THE 

ARTHUR  YOUNG 

ACCOUNTING 

COLLECTION 


Graduate  School  of 
Business  Administration 

Library  of  the 

University  of  California 

Los  Angeles 


This  book  ^   DT 


ae  last  date  stamped  below. 


SOUTHERN   BRANCH 

UNIVERSITY  OF  CALIFORNIA 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/costaccountingOOnichiala 


Cost  Accounting 


By 
J.  LEE  NICHOLSON,  C.P.A. 

President  of  the  J.  Lee  Nicholson  Institute  of  Cost  Account- 
ing; Supervising  Cost  Accountant,  Ordnance  Department, 
U.  S.  A.,  1917-18;  Author  "Factory  Organization  and 
Costs,"    "  Cost   Accounting.    Theory   and    Practice,"   etc. 


And 
JOHN  F.  D.  ROHRBACH,  B.C.S.,  C.P.A. 

Of  the  firm  of  J.  Lee  Nicholson  and  Company,  Instructor 
in  Cost  Accounting,  Columbia  University 


Fifth  Printing 

NEW  YORK 
THE  RONALD  PRESS  COMPANY 
1920 

^duate  SoMol  of  Bn.-..,  Mininiatratioa 


Copyright,   1919,  by 
The  Ronald  Press  Company 


Bus  Admin. 
Aaorary 

HF 
5686 

C8H5C 


PREFACE 


Cost  accounting,  as  a  vital  factor  of  successful  business 
administration,  has,  in  the  last  few  years,  been  brought  home 
in  various  ways  to  many  manufacturers  who  before  had  never 
seriously  appreciated  its  importance. 

The  Federal  Trade  Commission,  working  for  more  stable 
conditions,  has  conducted  a  widespread  campaign  of  education, 
explaining  in  detail  what  a  cost  accounting  system  is,  how  it 
is  operated,  and  the  resulting  business  advantages. 

Various  manufacturers'  associations  have  first  paid  skilled 
accountants  to  devise  cost-finding  methods  suited  to  their  spe- 
cial trade  conditions,  and  then  have  instituted  a  vigorous  propa- 
ganda to  induce  all  engaged  in  their  own  particular  industry 
to  adopt  them,  thus  making  these  methods  uniform  in  the  trade 
and  securing  uniformity  of  selling  prices  and  the  end  of  reck- 
less and  ignorant  price-cutting. 

Now  the  government,  with  its  need  to  levy  war  taxes  and 
its  consequent  necessity  for  searching  investigation  into  income 
and  excess  profits,  requires  that  estimates  and  approximations 
as  to  production  costs  and  profits  shall  give  place  to  rational 
accounting  systems  giving  actual  figures  by  uniform  methods. 

As  a  result  of  this  pressure  and  the  more  intelligent  educa- 
tion in  accounting  given  by  the  better  modern  schools,  cost  ac- 
counting has  become  the  rule  in  all  intelligently  conducted 
industries,  and  its  methods  have  been  extended  to  many  estab*- 
lishments  other  than  manufacturing  industries. 

Under  these  circumstances  it  has  been  found  necessary  to 
bring  out  this  volume  as  an  extension  of  Nicholson's  "Cost 
Accounting,  Theory  and  Practice"  published  in  191 3,  making 
the  work  more  comprehensive,  and  bringing  it  in  all  respects 
up  to  the  latest  practice.  In  its  preparation  the  authors  have 
kept  constantly  in  view  the  following  aims: 


iv  PREFACE 

First,  to  classify  the  details  of  cost  accounting  so  that  the 
reader,  be  he  accountant,  manufacturer,  or  student,  is  given 
a  well-defined  idea  of  the  forms  and  records  required  for  each 
separate  operation  and  of  how  these  forms  and  records  fit 
into  the  general  system  used  in  the  particular  establishment. 
The  need  for  such  a  classification  has  many  times  been  brought 
to  the  attention  of  the  authors  by  points  raised  during  con- 
ferences with  manufacturers. 

Second,  to  present  additional  and  specially  important 
data,  such  as  the  comprehensive  table  of  depreciation  rates  or, 
pages  146  et  seq.,  and  the  classification  of  and  distinction  be- 
tween asset  and  perishable  tools  on  pages  509  and  510.  Defi- 
nite information  of  this  kind  based  on  standard  practice  solves 
many  of  the  perplexities  which  arise  when  such  arbitrary  mat- 
ters as  depreciation  and  classification  are  left  to  individual 
judgment  with  its  tendency  to  be  biased  by  the  current  state- 
ment of  profit  and  loss. 

Similar  problems  and  difficulties  have  arisen  in  inter- 
preting the  terms  of  the  numerous  government  contracts  made 
during  the  war  period  and  their  cancellation  at  the  time  of 
writing.  Therefore,  the  present  work  is  brought  up  to  date 
by  a  detailed  discussion  of  what  may  be  chargeable  to  such  con- 
tract work  and  what  compensation  the  contractor  may  be  enti- 
tled to  on  the  cancellation  of  a  fixed  price,  a  fixed  profit,  or  a 
cost-plus  contract. 

Acknowledgment  is  hereby  made  to  Lieutenant-Colonel 
M.  F.  Griggs  and  Captain  J.  P.  Carlin  of  the  Ordnance  Depart- 
ment, U.  S.  A.,  for  their  valuable  contributions  to  the  discus- 
sion of  depreciation  rates;  also  to  the  editorial  staff  of  the 
Ronald  Press  Company  for  their  careful  revision  and  helpful 
suggestions  as  to  form  and  arrangement  of  manuscript. 

The  Authors 
January  2,  19 19 


CONTENTS 


Part  I — Elements  and  Methods  of  Cost-Finding 

Chapter  Page 

I    Cost-Finding  and  Its  Functions ,  .  i 

Changing  Social  and  Industrial  Demands 

Phases  of  Efficiency  Progress 

Importance  of  Cost-Finding 

Functions  of  Cost  Accounting 

Cost  Accounting  as  Related  to  General  Accounting 

Objections  to  Cost  Systems 

Advantages  of  Cost  Systems 

Application  of  Cost  Principles 

Uniform  Methods  of  Cost-Finding 

II    Elements  of  Cost .,   ,   ,   ,  ..   .   ,13 

Manufacturing  Costs 

Direct  Material 

Direct  Labor 

Direct  Expense 

Indirect  Charges 

Packing  Expense 

Selling  Expenses 

Administrative  Expenses 

Selling  Price 

Deductions 

Analysis  of  Elements  of  Cost 

III    General  Methods  of  Cost-Finding 24 

Requirements  of  Cost-Finding 

Order  Method  of  Cost-Finding 

Distinctive  Features  of  Order  Method 

Construction  Work 

Repair  Shops 

Plating  Shops 

Cabinet  Shops 

Garment  Manufacturing  Plants 

Straw  and  Felt  Hat  Plants 

Boot  and  Shoe  Plants 

Wood-Working  Plants 

Metal-Working  Plants 

Assembling  Departments 

Process  Method  of  Cost-Finding 

Distinctive  Features  of  Process  Method 
Foundries 


vi  CONTENTS 

Chapter  Page 

Paper  Mills 

Paint  and  Varnish  Manufacturing  Plants 
Chemical  Manufacturing  Plants 
Rubber  and  Celluloid  Manufacturing  Plants 
Manufacture  of  Foodstuffs 
Coal-Mining 

Ice  Manufacturing  Plants 
Treating  Departments 
Cutting    and     Machining    Department — ^Wood-Working 

Plants 
Summary  of  Cost-Finding  Methods 

IV    Department  and  Product  Classification   ...      35 

Factory  Departments 

Productive  Departments 

Designation  of  Departmental  Divisions 

Non-Productive  Departments 

Miscellaneous  Departments 

General  Operating  Expenses 

Summary  of   Departmental   Classification 

Classification  of  the  Product 


Part  II — Factory  Routine  and  Detailed  Reports 

V    Factory  Orders     45 

Function  of  the  Factory  Order 

Inadequacy  of  Verbal  Orders 

Written  Factory  Orders 

Kinds  of  Factory  Orders 

Production  Orders — Classification  ■ 

Designation  of  Quantities 

Sub-Production  Orders 

The  Grouping  of  Small  Orders 

Special  Production  Orders 

The  Production  of  Parts  and  Finished  Stock 

Repairs  to  Product  Orders 

Miscellaneous  Factory  Orders — Classification 

Construction  Orders 

Betterment  Orders 

Repair  Orders 

Standing  Orders 

Order  Numbers 

Summary  of  Factory  Orders 

Designing  Factory  Orders 

Issuance  and  Authorization 

Number  of  Copies 

Simple  Form  of  Factory  Order 

Development  of  Factory  Order 

Filing  and  Final  Disposition  of  the  Factory  Order 

Sales  Orders 

Registering  Sales  Orders 


CONTENTS  Vii 

Chapter  Page 

VI    Material  and  Material  Reports ,  ., ,  .   .   .   .;  65 

Procedure  in  Handling  Material 
Purchasing  the  Material 
Purchase  Requisition 
Purchase  Order 
Register  of  Purchase  Orders 
Filing  of  Catalogues,  etc. 
Receiving  the  Material 
Receiving  Record 
Report  of  Material  Received 
Invoices  from  Creditors 
Storing  Material 
Bin  Records- 
Record  of  Raw  Material 
Issuance  of  Material 
Material  Requisitions 
Bill  of  Material 
Credit  for  Material  Returned 
Disposition  of  Issued  Material 
Report  of  Material  Used 
Interdepartmental  Material  Reports 
Pricing  the  Material 
Inventorying  the  Material 
Summary  of  Material  and  Material  Reports 
Procedure  in  Handling  Records 

VII    Wage  Systems 98 

Kinds  of  Wage  Systems 

Day-Rate  System 

Piece-Work  System 

Diflferential-Piece-Rate  Plan 

Premium  and  Bonus  Systems 

Contract  System 

Profit-Sharing  and  Stock-Distributing  Plans 

VIII    Labor  Reports , ,.  „   ,  108 

Classification  of  Labor 
Outside  and  Inside  Labor 
Direct  and  Indirect  Labor 
Direct  Labor  Reports 
Time  of  Reporting  Labor 
Method  of  Reporting  Labor 
Requirements  of  Labor  Reports 
Form  of  Time  Report 
Pay-Roll  Exception  Report 
Labor  Transfer  Reports 
Rate  Records 

Summary  of  Labor  Reports 
Procedure   for  Handling  Reports 

IX     Departmental  Application  of  Overhead 126 

Classification 
Indirect  Material 


viii  CONTENTS 

Chapter  Page 

1.  Material  Which  Cannot  Be  Applied  as  a  Direct 

Charge 

2.  Supplies 

3.  Scrap  or  Waste  Material 

4.  Small  Perishable  Tools  and  Dies 
Indirect  or  Non-Productive  Labor 

I.  (a)  Cost  and  Idle  Time  of  Productive  Workers 

1.  (b)  Time  of  Helpers,  Sweepers,  Truckers 

2.  Supervisors  and  Foremen 

3.  Superintendence 

4.  Inspection,  When  Not  Considered  as  a  Direct 

Labor  Charge 

5.  Factory  Clerks'  Salaries 

6.  Employees  on  Defective  Work 

7.  Employees  on  Experimental  Work 
Indirect  Expenses 

1.  Rent 

2.  Insurance — Fire  and  Liability 

3.  Taxes 

4.  Interest 

5-7.  Power,  Light,  and  Heat 

8.  Freight  and  Cartage  Inward 

9.  Over,  Short,  and  Damage  Account 

10.  Miscellaneous  Factory  Expenses 

X    Depreciation  and  Maintenance, 144 

Depreciation 

Effect  of  Repairs  and  Renewals  on  Depreciation 

Factors  to  be  Considered  in  Fixing  Rates 

Schedule  of  Depreciation  Rates 

Basis  of  Standard  Rates 

Group  Rates 

Rates  for  Special  Machinery 

Method  of  Charging  off  Depreciation 

Difference  between  Amortization  and  Depreciation 

Legal  Definition  of  Depreciation  and  Amortization 

The  Effect  of  Overtime  on  Depreciation 

Limit  of  Maximum  Percentage  for  Overtime 

Abnormal  Depreciation  and  Amortization 

Maintenance,  Repairs,  and  Renewals 

XI    Distribution  of  Factory  Overhead ,  163 

Direct  and  Indirect  Distribution  of  Overhead 
General  Operating  Expenses 
Methods  of  Distributing  Overhead 

1.  Prime-Cost  Method 

Calculation  of  Prime-Cost  Rate 
Advantages  and  Disadvantage 
Conditions  under  which  Inapplicable 

2.  Productive-Labor-Cost  Method 

Applicability  of  Labor-Cost  Method 

3.  Productive-Labor-Hours  Method 

4.  (a)  Machine-Rate  Methods 

Method  of  Compiling  Machine  Rate 


CONTENTS  ix 

Chapter  Page 

4.  (b)  Fixed  Machine-Rate  Method 

4.  (c)   Sold-Hour  Method 

5.  Miscellaneous  Methods 
Fixed  Versus  Fluctuating  Rates 
Adjustment  of  Factory  Overhead 
Summary  of  Factory  Overhead 

XII    Factory  Overhead  Reports 185 

The  Source  of  Overhead  Items 

Reports  for  Recording  Indirect  Material 

Reports  for  Indirect  Labor 

Freight  and  Cartage  Inward 

Indirect  Expenses — Fixed  Charges 

Maintenance,  Repairs,  and  Renewals 

Power  Expenses 

Over,   Short,  and  Damage 

Distribution  or  Analysis  Record 

Deferred  Expense  Record 

Summary  of  Factory  Overhead  Reports 

XIII    Methods  of  Reporting  Production ,  .  198 

Purpose  of  a  Production  Report 

Form  of  Production  Report 

Simple  Production  Reports 

Production  Reports   Showing  Progress  of  Product 

Factory  Orders  as  Production  Reports 

Tag  and  Coupon  System  of  Production  Report 

Material  Reports  as  Production  Reports 

Labor  Reports  as  Production  Reports 

Defective  Work  Reports 

Time  of  Reporting  Production 

Disposition  of  Product 

Procedure  in  Handling  Production  Reports 

Summary  of  Production  Reports 


Part  III — Compiling  and  Summarizing  the  Cost  Records 

XIV    Cost  Sheets 211 

Scope  of  Cost  Sheet 
The  Job  or  Order  Cost  Sheet 
The  Process  Cost  Sheet 
Information  in  Heading 
Details  Shown  on  Cost  Sheets 
Simple  Form  of  Cost  Sheet 
Departmental  Cost  Sheets 
Detailed  Summary  of  Costs 
Progressive  Cost   Sheet 
Schedules  of  Estimated  Costs 
Posting  Cost  Information 
Posting  Material  Reports 
Posting  Labor  Reports 


CONTENTS 


Chapter 


Entering  Overhead  Costs 

Entering  Quantities 

Mechanical  Aids  for  Posting  Costs 

Checking  Costs 

Summary  of  Procedure 

Method  of  Filing  Cost  Sheets 

Summary  of  Method  of  Compiling  Cost  Sheets 


Page 


XV 


Stock  Records 231 

Purpose  and  Kind 

Method  of  Keeping  Stock  Records 

Raw  Material  Stock  Records 

Work  in  Process  Stock  Records 

Finished  Parts  Stock  Record 

Finished  Stock  Records 

Simple  Types  of  Stock  Records 

Records  of  Stock  Available  for  Unfilled  Orders 

Consignment  Records 

Semi-Finished  Goods  Stock  Records 

Procedure  in  Handling  Stock  Records 

Entering  Inventory  Balances 

Posting  Charges  and  Credits 

Testing,  Proving,  and  Adjusting 

Loose-Leaf  Versus  Bound  Stock  Record 

Obsolete  Stock  Record 

Filing  Stock  Records 

XVI    Summarizing    Records — Charging    Factory    Ex- 
penditures      242 

Purpose  of  Summarizing  Records 

Cost  Period 

Charging  Factory  Expenditures 

Method  of  Handling  Purchase  Invoices 

Purchase  Record 

Posting  from  Purchase  Record 

Accounts   Payable  Voucher 

Voucher   Register 

Posting  from  Voucher  Register 

Advantages  and  Disadvantages  of  Voucher  Register 

Combination  Voucher  Register  and  Purchase  Record 

Distribution   or  Analysis  Record     ' 

Summary  of  Material  Received 

Pay-Rolf 

Pay-Roll   Analysis 

Analysis  of  Charges  to  Jobs 

Process  Pay-Roll  Summary 

Summary  of  Salaries 

XVII    Cost  Summarizing  Records — Transfers  Within 

the  Factory 266 

Kinds  of  Records 

Summary  of  Material  Requisitions 

Summary  of  Departmental  Material  Used 


CONTENTS 


XI 


Chapter  Page 

Summaries  of  Material  Transfers 
Summary  of  Departmental  Transfers  of  Labor 
Summary  of  Shop  Order  Costs 
Summary  of  Defective  Work  Costs 
Summary  of  Factory  Overhead  Distribution 
Summary  of  Production 

XVIII    Cost  Summarizing  Records — Sales,  Cost  of  Sales, 

AND  Journal  Entries 276 

Kinds  of  Records 

Shipping  Records,  Sales  Records,  and  Costing  Sales 

Sales  Summary 

Cost  of   Sales   Summary 

Return   Credit   Records 

Returns  Summary  and  Cost  of  Returns  Summary 

Costs  and  Sales 

Journal  Entries 

Journal  Vouchers  and  Standing  Journal  Entries 

Chart  of   Cost   Summarizing  Records 


XIX 


XX 


Part  IV — Controlling  the  Cost  Records 

General  Ledger  Control  of  Factory  Accounts.   . 
The  Control  of  Cost  Records 
Income  and  Expense  Accounts 
Purchase  Transactions 
Pay-Roll  and  Analysis 
Sales  Transactions 
Cash  Transactions 
Ledger  Accounts 
Merchandise  Inventory 

Controlling  Factory  Transactions — First  Method 
Controlling  Factory  Transactions — Second  Method 
Proving  the  Inventory  Balances 
Subdivisions  of  Controlling  Accounts 
Controlling  Factory  Transactions — Third  Method 
Factory  Ledger  Controlling  Account  in  the  General 

Ledger 
Classification  Chart  of  General  Ledger  Accounts 
Arrangement  of  General  Ledger  Accounts 


293 


Factory  Ledger  Controlling  Accounts  . 
Methods  of  Keeping  the  Factory  Ledger 
Factory  Journal 
Raw  Material  Accounts 
Postings  to  Raw  Material  Accounts 
Work  in  Process  Accounts 
Postings  to  Work  in  Process  Accounts 
Form  of  Work  in  Process  Account 
Part-Finished  Stock  Accounts 
Postings  to  Part-Finished  Stock  Accounts 
Finished  Stock  Accounts 


315 


Xll 


CONTENTS 


Chapter 


Pace 


XXI 


XXII 


Postings  to  Finished  Stock  Accounts 

Productive  labor  Accounts 

Factory  Indirect  Expense  Accounts 

Distributed  Overhead  Account 

General  Ledger  Account 

Summary  of  Factory  Ledger  Controlling  Accounts 

Qassification  Chart  of  Factory  Ledger  Accounts 

Form  of  Factory  Ledger 

Arrangement  of  Factory  Ledger  Accounts 

Verification  of  Controlling  Accounts 

Adjusting  Discrepancies  in  Cost 

Closing  of  Factory  Ledger  Accounts 

Financial  and  Factory  Statements 338 

Time  and  Form  of  Preparation 

Kinds  of  Reports 

Reports  to  Executives 

Balance  Sheet 

Profit  and  Loss  Statement 

Manufacturing  Statement 

Trading  Staetment 

Statement  of  Merchandise  Inventory 

Statement  of  Changes  in  Plant  and  Equipment 

Reports  to  the  Sales  Departments 

Statement  of  Salesmen's  Sales,  Costs  and  Expenses 

Statement  of  Production,  Shipments  and  Inventory  of 

Finished  Stock 
Daily  Statement  of  Sales  and  Cost  of  Sales 
Statement  of  Sales,  Actual  Costs  and  Estimated  Costs 
Statement  of  Obsolete  or  Slow-Moving  Finished  Stock 
Reports  to  the  Purchasing  Department 
Reports   to    Factory    Superintendent   and    Production 

Manager 
Statement  of  Costs  and  Production 
Statement  of  Labor  Statistics  and  Cost  Averages 
Statement  of  Obsolete  Orders  in  Process 
Statement  of  Factory  Expenses 
Statement  of  Machine  Statistics 
Summary  of  Financial  and  Factory  Statements 
Method  of  Presenting  Statements 
Disposition  of   Statements 
Style  and  Ruling  of  Reports 
Interlocking  and  Agreeing  Reports 
Time  of  Presenting  Reports 

Method  of  Taking  Inventory 377 

Inventory  Methods 

Testing  the  Inventory 

Inventory  Adjustments 

Inventory  Sheet 

Physical  Inventories 

Preparation  for  Physical  Inventory 

Instructions  as  to  the  Taking  of  the  Inventory 

Method  of  Taking  the  Inventory 


CONTENTS  xiii 

Chapter  Page 

Method  of  Listing  the  Inventory 
Method  of  Pricing  the  Inventory 
Pricing  Raw  Material 
Pricing  Work  in  Process 

Pricing  Finished  Parts  and  Finished  Stock  Items 
Figuring,  Checking  and  Proving  the  Inventory 

XXIII  Plant  Asset  Records 391 

Nature  and  Valuation  of  Plant  Assets 

Plant  Asset  Records 

Purposes  of  Plant  Record 

Machines 

Tools' 

Fixtures 

Machine  Parts 

Dies,  Molds,  etc. 

Records  by  Appraisal  Companies 

Part  V — The  Installation  of  a  Cost  System 

XXIV  General  Considerations 399 

The  Cost  Accountant 

Work  of  the  Cost  Accountant 

Cost  Classification  of  Enterprises 

Internal  Problems  Affecting  Cost  Installations 

Fitting  the  Cost  System  to  Existing  Conditions 

Red  Tape 

Reports  for  Executives 

Summary  of  Cost  Procedure 

1.  Charging  the  Factory 

2.  Receiving  and  Storing  Material 

3.  Proving  and  Charging  Pay-Rolls 

4.  Delivering  Material  to  Operation 

5.  Computing  Costs 

6.  Crediting  Production 

7.  Distributing  the  Factory  Overhead 

8.  Charging  Production  to  Stock 

9.  Costing  Sales  and  Shipments 

10.  Preparing  and  Posting  the  Summarizing  Records 

11.  Proving  Subsidiary  Records 

12.  Preparing  and  Proving  the  Trial  Balance 

13.  Preparing  Factory  and  Financial  Statements 
Cost  Systems' 

Forms  for  Cost  Records  and  Reports 
Presenting  Report  on  Cost  Systems 

XXV    Installing  a  Cost  System — Examination  of  Plant  414 
Nature  of  Examination 
Examination  of  an  Existing  Cost  System 
Efficiency  Details 

Procedure  for  Examination  of  a  Plant 
I.  Product  Classification 


av 


CONTENTS 


Chapter 


Page 


2.  Sales  Department 

3.  Departments  of  the  Factory  and  Manufacturing 

Processes 

4.  Foundry  Department 

5.  Plating  Room 

6.  Wood-Working  Shops 

7.  Dry  Kilns 

8.  Power  Department 

9.  Packing  Department 
ic.  Shipping  Department 

11.  Estimating  Department 

12.  Cost  Department 

13.  Factory  Orders 

14.  Raw  Material  and  Storeroom  Requirements 

15.  Purchasing  Division 

16.  Receiving  Department 

17.  Storeroom 

18.  Labor  and  Labor  Reports  iit  Use 

19.  Factory  Overhead  Items 

20.  Production 

21.  Finished  Parts  and  Finished  Stock 

22.  Compiling  the  Costs 

23.  Cost  Summarizing  Records 

24.  Genera'  Accounting  Records  of  Original  Entry 

25.  General  System  of  Accounting 

26.  Statements 

27.  Miscellaneous  Information 
Examination  of  Auxiliary  Mechanisms 
Method  of  Obtaining  the  Information 

XXVI    Installing  a  Cost  System — Method  of  Starting 

Operations 442 

Preliminary  Test  of  Records 

Order  of  Procedure 

Qassifying  and  Reanalyzing  the  Beginning  Inventory 

Entering  Inventory  on  Records 

Proof  of  Entries 

Handling  Work  in  Process  Items 

Starting  New  Orders  in  the  Factory 

Overhead  Distribution 

Classification  of  Product,  Departments  and  Accounts 

Reports  and  Records 

Part  VI — Simplified  Cost-Finding  Methods 

XXVII    Elementary  Cost  Systems 451 

Valuation  of  Closing  Inventory 
Method  of  Preparing  Statements 
Advantage  of  Percentage  Method 
Percentage  Method  Applied  to  Several  Product  Clas- 
sifications 
Unit  Method  of  Figuring  Costs 
Applicability  of  Unit  Method 
Proof  of  Records 


CONTENTS 


XV 


Chapter                                                                                          Page 
XXVIH    Estimating  Cost  Systems. 459 

Special  Features  of  Estimating  Method 
Method  of  Operating  System 
Summary  of  Procedure 
Development  of  System 

Verification  of  Total  Costs — First  Methm) 

Special  Records  Required 
General  Ledger  Accounts 
Method  of  Verification 

Verification   of   Material,   Labor  and   Overhead 
Estimates — Second  Method 

Special  Records  Required 
Analysis  of  Inventory 
Operation  of  Ledger  Accounts 
Method  of  Verification 

Verification  of  Costs  by  Several  Lots  or  Groups 
— Third  Method 

Special  Records  Required 

Raw  Materials  Costs 

Labor  Costs 

Overhead  Costs 

Opening  Inventory  Analysis 

Operation  of  Ledger  Accotints 

Method  of  Verification 

Verification   of   Costs  by  Operating   Departments 
— Fourth  Method 

Special  Forms  Required 

Ledger  Accounts  Opened 

Charges  for  Expenditures 

Crediting  Production 

Recording  Cost  of  Sales 

Method  of  Verification 

Adjusting  Differences  in  Inventory 

XXIX    Uniform  Cost  Methods 481 

The  Advantages  of  Standard  Methods 
Examples  of  Haphazard  Methods 
Method  of  Standardizing  Costs 
Details  to  be  Considered 

Part  VII — Cost-Plus  Contracts 

XXX    Recommendations  of  Interdepartmental  Cost 

Conference 487 

Work  of  Conference 
Recommendations — Their  Object 
Fair  Terms  and  Fixed  Prices 
Form  of  Purchase-and-Sale  Contract 


Xvi  CONTENTS 

Chapter  Page 

Relations  Established  by  Contract 
Fixed  Profit  Plan 
Adjustment  of  Fixed  Profit 
Standardized  Forms  and  Methods 
Summary  of  Recommendations 
Normal  Costs  versus  Total  Costs 

XXXI    Cost-Plus  Contracts — Material,  Labor,  and 

Equipment  Items     496 

General  Consideration  of  Terms  of  Contract 
Need  of  Special  Rulings 

Betterments  and  Equipment 

Treatment  of  Additions  and  Special  Facilities 

Treatment  of  Fixtures  and  Special  Equipment 

Office  Furniture  and  Fittings 

Rebuilding,  Renovating  and  Equipment  Charges 

Freight  or  Express  on  Equipment 

Setting  Up  Machines 

Monorail  System 

Installing  Workmen's   Washing  Facilities 

Housing  of  Laborers 

Repairs,  Renewals  and  Replacements 

Method  of  Treatment 
Extraordinary  Repairs 

Materials  and  Supplies  Items 

Material  Cost 

Supplies 

Pricing  of  Material  and  Supplies 

Shortages,  Overs  and  Obsolete  Material 

Inventory  Adjustments 

Drayage 

Packing  and  Packing  Supplies 

Transfers  of  Inventory  Items  Between  Factories 

Spare  Parts 

Tools 

Distinction  Between  Tools  and  Machines 

Asset  Tools  and  Perishable  Tools 

Scrap  Value  of  Tools 

Classification  of  Tools 

Handling  and  Storing  of  Tools 

Accounting  for  Tools 

Asset  Tools  Charged  at  Cost 

Perishable  Tools 

Old  Tools  Remade  or  Salvaged 

Repairs  or  Replacement  of  Tools 

Identification  of  Tools  Used 

Treatment  When  Basis  of  Contract  is  Changed 


CONTENTS 


xvu 


Chapter 

*  Overtime  and  Idle  Time 

Overtime 

Idle  Time  on  Operation 

Waiting  Time  as  a  Deferred  Charge 

XXXII    Cost-Plus    Contracts — Expense   and   Overhead 
Items 

Distribution  of  Overhead 

Direct  and  Indirect  Distribution 

Distribution  Over  Periods  of  Less  Than  a  Month 

Overhead  on  Bulk  Products 

Deferred  Overhead  Charges 

Preliminary  Expenses 
Deferred  Expenditures 

Administrative  Expenses 

Method  of  Treatment 

Excessive  Salaries 

Salaries   Paid   After   Termination   of   Employment 

Bonus  and  Pension  Payments 

Bonus  Payments 

Pension  or  Compensation  Indemnities 

Insurance  and  Taxes 

Fire   Insurance 

Insurance  Other  Than  Fire 

Liability  Insurance 

Premiums  for  Life  Insurance 

Income  and  War  Excess  Profits  Taxes 

Government  Taxes  on  Freight 

Interest,  Depreciation  and  Depletion 

Interest  as  a  Cost 

Interest    on   Borrowed    Money 

Interest  on  Working  Capital 

Inventories 

Interest  on  Plant,  Machinery  and  Equipment 

Depreciation  and  Interest  on  Plant  Assets 

Depletion 

Method  of  Figuring  Depreciation 

Guarding  of  Property 

Police  Protection 

Guard  House 

Guards'  Uniforms,  Badges  and  Other  Equipment 

Distribution   of   Protection   Charges 

Miscellaneous  Expense  Items 

Blue-Prints 
Cash  Discount 


Page 


516 


XVIU 


CONTENTS 


Chapter 


XXXIII 


Drafting  Expenses 

Defective  Work 

Experimental  Expense 

Employment  Department 

Intercompany  Expenses 

Patents  and  Royalty 

Rental — Specific  Charge  for  Same 

Scrap  and  Waste 

Selling  Expense 

Testing  Expense 

Training  Employees  Expense 

Welfare  Work 

Errors  and  Losses  Due  to  Changes 

Reclamation  of  Errors 
Changes  in  Specifications 

Items  Not  Chargeable  Unless  Strictly  Applicable 

Attorney  Fees 

Bad  Debts 

Brokerage  Expenses 

Donations  and  Entertainment 

Real  Estate  Investments,  Expenditures,  etc. 

Reserves 

Engagement  of  Expert  Services 

Suspension  or  Cancellation  of  Contracts     . 

General  Considerations 

Cancellation  of  Fixed  Price  Contracts 

Valuation  of  Inventory 

Settlement  of  Commitments 

Amortization 

Plant  Rearrangment 

Experimental  Work 

Special  Tools 

Lease  of  Grounds  or  Building 

Occupancy 

Contract  for  Service 

Organization  Expense 

Profits 

Saving  Clause  in  Contract 

Cancellation  of  Fixed  Profit  Contracts 

Difference  Between  Fixed  Price  and  Fixed  Profit 

Contracts 
Saving  Clause 

Cancellation  of  Cost-Plus  Contracts 

Distinction  Between  Fixed  Profit  and  Cost-Plus 
Contract 


Page 


540 


FORMS  AND  CHARTS 


Elements  of  Cost 
Form  Page 

1.  Diagram  Showing  Relation  of  Cost  Elements  to  Selling  Price  .  20 

2.  Chart  Showing  Analysis  of  Cost  Elements 22 

General  Methods  of  Cost-Finding 

3.  Chart  Showing  Methods  of  Cost-Finding  Applied  to  Various 

Industries        33 

4.  Classification  Chart  of  Factory  Departments 41 

Factory  Orders 

5.  Classification  Chart  of  Factory  Orders 56 

6.  Simple  Factory  Order 58 

7.  Sales   Order 62 

Material  and  Material  Reports 

8.  Purchase  Requisition 66 

9.  Purchase  Order 69 

10.  Register  of  Purchase  Orders 71 

11.  Receiving  Record 73 

12.  Report  of  Material  Received 75 

13.  Invoice  Stamp "jj 

14.  Bin  Record 78 

15.  Record  of  Raw  Material 79 

16.  Material  Requisition 83 

17.  Bill  of   Material 85 

18.  Credit  for  Material  Returned  to  Stock 87 

19.  Report  of  Material  Used 89 

20.  Interdepartmental  Material  Report 90 

21.  Inventory   Test 93 

22.  Inventory   Sheet 94 

23.  Chart  Showing  Handling  of  Material  and  Material  Reports     .  96 

Labor  Reports 

24.  Daily  Labor  Report 114 

25.  Daily   Piece-Work   Report 115 

26.  Job   Ticket 116 

27.  Pay- Roll  Exception  Report 117 

28.  Labor  Transfer  Report 119 

29.  Wage  Rate  Record 120 

30.  Classification  Chart  of  Labor  Reports 121 

xix 


XX  FORMS  AND  CHARTS 

Form  Page 

Factory  Overhead  Reports 

31.  Qassification  Chart  of  Factory  Overhead 183 

32.  Schedule  of  Fixed  Charges 191 

33.  Power  Plant  Distribution  Record 194 

34.  Classification  of   Factory  Overhead   Reports 197 

Production  Reports 

35.  Daily   Production   Report — Simple   Form 199 

36.  Defective  Work  Report 205 

37.  Classification  Chart  of  Production  Reports 208 

Cost  Sheets 

38.  Process   Cost  Sheet 213 

39.  Cost  Tag 216 

40.  Departmental  Total  Cost  Sheet 2i6 

41.  Individual  Departmental  Cost  Sheet 217 

42.  Complete  Cost  Sheet,  Giving  Departmental  Details     .     .      219,  220 

43.  Progressive  Cost  Sheet 222 

44.  Calculation  Blank  Used  in  Garment  Factory 223 

45.  Classification  Chart  of  Cost  Sheets 229 

Stock  Records 

46.  Finished  Stock  Record 235 

47.  Finished  Product  or  Parts  Stock  Record 236 

48.  Finished  Product  Stock  Record,  Showing  Filled  and  Unfilled 

Orders        237 

Summarizing  Records 

49.  Invoice  Stamp,  Covering  Data  for  Purchase  Record  ....  244 

50.  Purchase  Record 246 

51.  Accounts  Payable  Voucher 247,  248 

52.  Voucher  Register 252,  253 

53.  Distribution  or  Analysis  Record 256 

54.  Summary  of  Material  Received 258 

55.  Pay-Roll    Record 260 

56.  Pay-Roll  Analysis 263 

57.  Summary  of  Material  Requisitions 267 

58.  Summary  of  Shop  Order  Costs 271 

59.  Summary  of   Factory   Overhead 273 

60.  Summary  of  Production 274 

61.  Shipping    Order 277 

62.  Shipping    Order    Combined    with    Customer's    Invoice,    Sales 

Record  and  Cost  of  Sales  Record 278,  279 

63.  Sales    Summary 282 

64.  Cost   of    Returns   Record    Combined    with    CuS'tomer's    Credit 

Memo  and  Office  Record  Memo 284,  285 

65.  Register  of  Sales  and  Costs 287 

66.  Journal   Voucher 289 

67.  Standing  Journal  Entries  Form 290 

68.  Chart  of  Cost  Summarizing  Records  and  Procedure  .     ,     ,     .  291 


FORMS  AND  CHARTS  xxi 

Form  Page 

Controlling  Accounts 

69.  Classification  Chart  of  General  Ledger  Accounts  .     .     .     312,  313 

70.  Work  in  Process  Account 321 

71.  Work  in  Process  Account  Showing  Elements  of  Cost  .  .  .  321 
^2.  Factory  Indirect  Expense  Account  for  Each  Item  ....  326 
^2,.    Factory  Indirect  Expense  Account  for  Each  Department   .      .  326 

74.  Summary  Chart  of  Factory  Ledger  Controlling  Accounts  .     .  330 

75.  Classification  Chart  of  Factory  Ledger  Accounts  .     .     .     323,  333 

Financial  and  Factory  Statements 

76.  Comparative  Balance  Sheet 341 

^^.    Profit  and  Loss  Statement 344,  345 

78.  Manufacturing  Statement 347 

79.  Comparative  Statement  of  Merchandise  Inventory     ....  350 

80.  Statement  of  Charges  in  Plant  and  Equipment     ....  351 

81.  Statement  of  Salesmen's  Sales,  Costs  and  Expenses  ....  354 

82.  Statement  of  Production,  Shipments  and  Inventory  of  Finished 

Stock 356 

83.  Daily  Statement  of  Sales  and  Cost  of  Sales 357 

84.  Statement  of  Sales,  Shov^ring  Profit  or  Loss  on  Special    Items  358 

85.  Statement  of  Sales,  Actual  Costs  and  Estimated  Costs  .     .     .  360 

86.  Statement  of  Obsolete  or  Slow-Moving  Stock 361 

87.  Statement  of  Merchandise  Purchases  and  Inventory  of  Raw 

Materials 363 

88.  Statement  of  Obsolete  Raw  Material  Items 364 

89.  Comparative  Statement  of  Maximum  and  Minimum  and  Actual 

Quantities 365 

90.  Statement  of  Costs  and  Production z^7 

91.  Statement  of  Labor  Costs  and   Averages 369 

92.  Statement  of  Obsolete  or  Slow-Moving  Orders  in  Process  ,     .  370 

93.  Statement  of  Factory  Expenses 371 

94.  Statement  of  Machine   Costs 372 

95.  Chart  of  Financial  and  Factory  Statements 374 

Inventory  Records 

96.  Work  in  Process  Inventory  Sheet 380 

97.  Inventory  Tag 385 

98.  Plant  Asset  Record 392,  393 

Estimating  Costs 

99.  Schedule  of  Total  Estimated  Costs 463 

100.     Summary  of  Estimated  Costs  of  Sales  ........  464 

loi.    Analysis  of   Inventory 467 

Cost-Plus  Contracts 

102.    Record  of  Tools  Issued,  Used  and  Scrapped Sli 


COST  ACCOUNTING 

Part  I — Elements  and  Methods  of  Cost- Finding 


CHAPTER  I 

COST-FINDING  AND  ITS  FUNCTIONS 

Changing  Social  and  Industrial  Demands 

The  importance  of  efficiency  in  business  organization  has 
never  been  so  generally  recognized  as  at  the  present  time,  and 
there  is  promise  of  even  greater  development  in  the  future. 
One  indication  of  this  condition  is  the  increased  volume  of 
literature  that  is  now  available  on  the  subject.  More  than 
90%  of  this  literature  has  been  published  in  the  last  decade, 
and  fully  75%  in  the  last  five  years. 

The  ultimate  causes  of  this  are  to  be  found  in  the  broad 
field  of  economics.  The  gradual  absorption  and  development 
of  natural  resources,  the  exploitation  of  new  fields  of  com- 
merce, the  increase  of  population,  the  higher  standards  of 
living,  the  greater  complexities  of  demands  in  modern  life — 
these  are  but  a  few  of  the  innumerable  influences  reflected  in 
the  industrial  life  of  today. 

Transformed  to  some  extent,  these  changes  meet  the 
manufacturer  in  the  form  of  demands  for  more  wages  and 
better  labor  conditions,  in  the  increased  cost  of  materials,  and 
in  a  much  keener  competition  in  every  phase  of  manufacturing 
and  selling.  He  must  either  adapt  his  methods  to  meet  the 
situation,  or  retire  from  the  field.  Only  one  practicable  road 
lies  before  him,  and  that  is  a  keener  realization  of  the  existing 

I 


2  COST-FINDING  ELEMENTS  AND  METHODS 

possibilities  in  his  business.  To  be  specific,  he  must  eliminate 
waste  of  every  kind  and  plan  his  organization  so  as  to  increase 
the  production  per  unit  of  cost. 

Phases  of  Efficiency  Progress 

This  search  for  factory  efficiency  assumes  many  phases 
which  overlap  each  other,  more  or  less.  From  the  mechanical 
standpoint,  it  involves  a  study  of  plant  location  and  construc- 
tion, new  and  better  types  of  machines,  economies  in  producing 
and  using  power,  etc.  From  the  labor  standpoint,  it  has  given 
rise  to  new  and  improved  methods  of  wage  payment,  such  as 
the  differential  rate  plan  and  the  premium  and  bonus  methods 
with  their  various  modifications,  all  of  which  offer  increased 
pay  for  greater  individual  effort  and  efficiency.  Even  the 
motions  and  operations  of  the  workmen  are  being  analyzed  as 
to  their  component  parts,  with  the  view  of  eliminating  those 
which  are  unessential  and  wasteful  of  effort.  While  some 
of  these  methods  are  still  novelties,  the  time  is  not  far  distant 
when  most  manufacturers  will  have  to  adopt  them,  or  some- 
thing similar,  for  their  own  salvation. 

From  the  standpoint  of  factory  organization,  more  has 
been  attempted  and  accomplished  than  in  almost  any  other 
direction,  because  the  need  has  been  pressing  and  immediate. 
The  purpose  is  to  bring  the  activities  of  the  whole  plant,  no 
matter  how  widespread,  under  the  direct  review  and  control 
of  the  management.  It  is  felt,  and  rightly  so,  that  a  con- 
siderable loss  is  incurred  unless  efficient  systems  and  reliable 
statistics  enable  the  management  to  keep  in  touch  with  the 
various  steps  of  production,  and  to  locate  the  responsibility  for 
waste,  lost  time,  shop  errors,  etc. 

Quite  as  essential  in  its  bearing  on  efficiency  is  the  proc- 
ess of  cost-finding;  that  is,  finding  just  what  it  costs  to  manu- 
facture a  certain  order  or  article.  Not  only  is  this  necessary 
for  the  purpose  of  determining  possible  selling  prices,  but  it 


COST-FINDING  AND  ITS  FUNCTIONS  3 

provides  the  ultimate  measure  by  which  manufacturing 
methods  may  be  compared,  and  the  best  be  thereby  deter- 
mined. 

Importance  of  Cost-Finding 

Through  the  Sherman  Act,  the  United  States  Government 
prohibited  manufacturers  from  agreeing  on  a  uniform  seUing 
price.  While  this  was  a  justifiable  law  and  was  necessary  in 
order  to  curb  combinations,  at  the  same  time  it  produced  a 
certain  amount  of  chaos  because  of  the  constant  cutting  of 
prices.  There  is,  however,  no  law  to  prevent  the  introduction 
of  a  cost  system  or  a  uniform  method  of  cost  as  applied  to  a 
certain  definite  industry,  and  the  importance  of  this  has  re- 
cently been  strongly  emphasized  by  the  government.  The 
Federal  Trade  Commission,  through  the  untiring  efforts  of  its 
former  chairman,  Hon.  Edward  N.  Hurley,  in  its  work  in  con- 
nection with  cost-finding,  made  a  deep  impression  on  the  minds 
of  manufacturers  throughout  the  country  as  to  the  advantage 
and  necessity  of  this  branch  of  accounting. 

Government  investigations  show  that  out  of  a  quarter  of 
a  million  business  corporations  in  this  country,  the  majority 
are  making  no  profit,  and  that  over  70%  are  making 
less  than  the  salary  of  a  good  executive;  furthermore,  these 
statistics  show  that  only  5%  of  the  manufacturers  know 
what  their  goods  cost  them  to  make.  This  statement  does 
not  mean  that  the  manufacturer  does  not  figure  his  cost,  for 
every  manufacturer,  no  matter  how  crudely  it  may  be  done, 
must  do  some  sort  of  figuring  on  his  cost  in  order  to  arrive 
at  a  selling  price.  The  trouble,  in  the  majority  of  cases,  is 
that  the  manufacturer  has  no  systematic  method  of  figuring 
costs  and  has  no  way  of  proving  his  cost  estimates  after  he  has 
made  them. 

The  need  for  better  methods  of  cost  accounting  has  been 
justified  by  the  confusion  which  the  government  found  exist- 


4  COST-FINDING  ELEMENTS  AND  METHODS 

ing  at  the  outbreak  of  war  in  many  of  the  trades  in  connec- 
tion with  this  matter.  It  was  necessary  in  case  after  case  to 
estabHsh,  at  an  immense  expense,  a  bureau  and  corps  of  ex- 
perts to  endeavor  to  find  out  the  cost  of  manufactured  products. 
All  this  trouble,  waste  of  time,  and  expense  would  have  been 
saved  for  the  government,  and  much  for  the  manufacturer  as 
well,  had  there  been  proper  methods  of  cost  accounting  in 
operation. 

The  war  is  over  and  the  country  at  the  present  time  is 
in  a  very  prosperous  state.  A  huge  program  of  reconstruc- 
tion along  industrial  and  economic  lines  must  take  place.  As 
stated  by  the  Canadian  Minister  of  Trade  and  Commerce : 
"The  world  is  about  to  plunge  into  a  trade  and  economic  con- 
test in  which  forces  will  assume  totally  new  alignments ;  when 
competition  will  be  keener  and  stronger  than  ever,  and  when 
science  and  organization  will  play  a  part  in  every  successful 
role."  The  introduction  of  correct  cost  methods,  backed  by 
a  sound  organization,  will  enable  the  manufacturer  to  be  pre- 
pared to  meet  his  problems  and  to  solve  them  intelligently 
when  the  time  comes. 

Functions  of  Cost  Accounting 

While  the  present  book  treats  primarily  of  cost  account- 
ing, it  would  be  a  mistake  if  its  scope  were  limited  to  finding 
costs  only.  Any  good  cost  system,  properly  operated,  per- 
forms two  distinct  though  related  functions : 

The  first,  which  may  be  called  the  direct  function,  is  that 
of  ascertaining  actual  costs.  This  should  always  be  supple- 
mented by  the  second,  or  indirect  function — that  of  supplying, 
in  its  system  of  reports,  the  information  necessary  to  organize 
the  many  departments  of  a  factory  into  working  units.  In 
addition  to  this,  it  enables  the  activities  of  these  units  to  be 
directed  in  accord  with  some  definite  plan  designed  to  eliminate 
the  inefficiencies  in  the  various  departments  of  the  business. 


COST-FINDING  AND  ITS  FUNCTIONS  5 

Cost  Accounting  as  Related  to  General  Accounting 

Cost  accounting,  as  a  science,  is  a  branch  of  general  ac- 
counting. Its  province  is  to  analyze  and  record  the  cost  of 
the  various  items  of  material,  labor,  and  indirect  expense  in- 
curred in  the  operation  of  a  factory,  and  so  to  compile  these 
elements  as  to  show  the  total  production  cost  of  a  particular 
piece  of  work.  With  the  cost  books  once  established,  the 
best  modern  usage  is  to  incorporate  their  record  in  total  in  the 
general  financial  books.  In  this  way  the  modern  cost  system 
builds  up  an  interlocking  series  of  accounts  which  furnish  the 
basis  for  a  detailed  study  of  the  operations  of  a  manufacturing 
business. 

The  accounts  which  appear  in  the  cost  books,  however, 
differ  in  nature  and  scope  from  those  in  the  general  financial 
books.  The  latter  exhibit  the  complete  record  of  the  financial 
and  commercial  transactions  of  a  business,  whereas  the 
former  treat  only  of  those  transactions  which  deal  with,  and 
are  properly  chargeable  to,  the  manufacture  of  the  product. 
Like  the  general  books,  the  cost  records  show  the  amounts 
spent  for  material,  supplies,  labor,  and  indirect  expenses ;  but, 
in  addition,  there  appear  accounts  with  the  raw  material  classi- 
fications, accounts  with  various  operating  departments,  and 
accounts  with  the  classifications  of  the  finished  and  partly 
finished  product.  The  last  named  accounts  are  those  which 
make  an  analysis  of  costs  possible. 

Objections  to  Cost  Systems 

Arguments  against  cost  systems  have  been  presented  so 
often  that  perhaps  it  may  prove  advantageous  to  review  some 
of  these  so-called  objections.  They  may  be  summarized  under 
the  five  headings  which  follow : 

I.  Unique  Business.  The  commonest  objection  set  forth 
by  a  manufacturer  who  opposes  cost  systems  is  that  his  busi- 
ness is  entirely  distinctive,  and  that  a  cost  system  is  absolutely 


6  COST-FINDING  ELEMENTS  AND  METHODS 

impracticable  in  so  far  as  his  particular  industry  is  concerned. 
Of  course,  there  may  be  a  few  exceptional  industries  where  it 
is  impossible  to  operate  successfully  a  complete  cost  system 
with  all  of  its  ramifications.  Some  practical  cost  system,  how- 
ever, can  be  installed  in  every  manufacturing  industry.  It 
may  be  that  the  most  improved  methods  could  not  be  installed 
in  their  complete  form,  but  some  of  these  advanced  methods 
can  be  installed  and  can  be  made  thoroughly  practicable. 

2.  Cost  of  Installation.  Cost  systems  are  objected  to  on 
account  of  the  excessive  cost  of  their  installation.  This  should 
be  considered  in  the  same  way  as  any  other  investment — that 
is,  the  amount  paid  for  the  system  should  not  be  regarded 
alone,  but  its  cost  should  also  be  considered  in  connection 
with  the  income-producing  power  of  the  system.  "What  is 
the  system  worth  as  a  producer  of  profit?"  is  a  far  more  im- 
portant question  than,  "What  did  the  system  cost?" 

3.  Cost  of  Operation.  In  reviewing  the  objection  that 
the  cost  of  operating  the  system  is  excessive,  consideration 
must  again  be  given  to  the  value  of  the  system  as  a  producer 
of  income.  If  the  advantages  derived  from  the  operation  of 
the  system  do  not  compensate  the  manufacturer — that  is,  if 
it  does  not  save  more  money  than  is  paid  for  clerk  hire,  sta- 
tionery, and  other  expenses  incidental  to  its  operation — the 
cost  system  either  is  a  poor  one  or  is  not  serving  its  entire 
purpose.  Cost  systems  cannot  be  operated  successfully  with- 
out brains,  and  if  the  infonnation  disclosed  by  the  reports  of 
the  advanced  cost  systems  of  today  is  not  used  in  an  efficient 
manner,  the  cost  system  is  not  serving  its  purpose  as  a  "pro- 
ducer of  profits." 

4.  Red  Tape.  The  accusation  that  a  cost  system  is  al- 
ways tied  up  with  "red  tape"  is  often  made  without  being 
proved.  What  is  meant  by  the  term  "red  tape"  depends  to 
some  extent  upon  the  workings  of  the  mind  of  the  person 
using  that  expression.     It  may  represent  a  violent  prejudice 


COST-FINDING  AND  ITS  FUNCTIONS  7 

against  cost-finding  in  general  or  against  the  number  and 
kinds  of  forms  and  records  which  are  necessary  in  the  opera- 
tion of  the  cost  system  and  which  the  uninitiated  regard  as 
more  or  less  superfluous. 

As  a  matter  of  fact,  most  cost  systems  which  have  been 
properly  planned  and  which  are  operated  efficiently  provide  for 
numerous  "short  cuts"  in  summarizing  the  information  for 
accounting  purposes.  Mechanical  devices  as  an  aid  in  the 
operation  of  cost  systems  have  practically  eliminated  the  so- 
called  "red  tape." 

5.  Failure  of  Numerous  Cost  Systems.  It  is  a  matter  of 
record  that  a  cost  system  frequently  fails  to  give  the  results 
expected  from  its  operation.  The  test  of  success  or  failure 
lies  in  the  fact  that  it  is  or  is  not  serving  all  of  its  functions, 
which  include  ascertaining  true  and  accurate  costs  to  be  used 
as  a  basis  for  correcting  irregularities  and  thereby  "producing 
profits." 

Numerous  facts  which  may  explain  the  failure  in  some 
instances  of  cost  systems  may  be  cited.     These  include : 

(a)  Impracticable  system. 

(b)  Practicable  system,  improperly  installed. 

(c)  Management  not  in  sympathy  with  the  work  of 

systematizer. 

(d)  Opposition  or  lack  of  co-operation  on  the  part  of 

employees. 

These  are  not  to  be  considered  as  excuses  for  the  failure 
of  cost  systems.  They  include  only  recorded  facts  which 
have  accounted  for  failures.  As  a  word  of  caution,  therefore, 
it  may  be  said  that,  before  devising  or  installing  a  cost  system, 
it  is  absolutely  essential  to  secure  the  active  support  of  the 
management  so  that  all  "kinks"  may  be  overcome  and  all  dis- 
senters eliminated.  Systems  cannot  be  successful  if  they  are 
installed  against  the  wishes  of  the  management. 


8  COST-FINDING  ELEMENTS  AND  METHODS 

Advantages  of  Cost  Systems 

The  advantages  of  cost  systems,  with  respect  to  increas- 
ing the  efficiency  of  a  plant  from  an  organization  standpoint, 
may  be  summarized  under  the  following  six  headings : 

1.  Perpetual  Inventory.  The  cost  records  provide  for  a 
perpetual  inventory  which  furnishes  information  for  the  prep- 
aration of  monthly  statements  showing  the  industrial  and 
financial  condition  and  the  operating  results  of  a  company. 
These  monthly  statements  should  include : 

(a)  Balance  sheet  showing  the  financial  condition  of  the 

company  at  the  end  of  each  month. 

(b)  Profit   and   loss   statement   showing   the   financial 

operations  of  the  company  during  the  month. 

(c)  Manufacturing  statement,  or  statement  of  factory 

expenditures,  showing  the  financial  operations  of 
the  various  departments  of  the  factory  during 
the  month. 

(d)  Statement  of  salesmen's  sales  and  costs  showing 

the  profit  or  loss  of  each  salesman  or  territory  of 
the  country  for  the  month. 

2.  Prices  and  Policy  Data.  The  costs  of  each  article, 
class  of  product,  or  operation  being  separately  shown,  the 
management  has  the  necessary  data  at  hand  to  guide  it  in 
making  changes  of  policy  or  methods,  these  including: 

(a)  Establishing  correct  selling  prices  with  the  true 

costs  as  the  basis. 

(b)  Eliminating  the  manufacture  of  any  articles  which 

show  losses,  and  substituting  for  these  more 
profitable  articles. 

(c)  Increasing  the  efficiency  of  the  salesmen  by  enabling 

them  to  concentrate  their  efforts  and  energies  on 
the  more  profitable  articles. 


COST-FINDING  AND  ITS  FUNCTIONS  9 

(d)  Establishing  correct  rates  of  commission  for  sales- 
men upon  the  various  classes  of  product. 

3.  Comparative  Costs.  Costs  for  different  periods  and 
under  different  conditions  are  obtainable,  enabling  the  follow- 
ing comparisons  to  be  made : 

(a)  A  comparison  of  each  article,  job,  or  operation  cost 

with  standard,  estimated,  predetermined,  or  pre- 
vious costs. 

(b)  A  comparison   of  article,   job,   or  operation  cost 

under  various  methods  of  manufacturing,  as  for 
instance,  bench  work  with  machine  work,  day- 
work  with  piece-work,  piece-work  with  premium 
or  bonus  work,  etc. 

(c)  A  comparison  of  article,  job,  or  operation  cost  with 

outside  prices  under  the  various  market  condi- 
tions, thus  ascertaining  when  parts  or  operations 
may  be  purchased  or  manufactured  outside  at  a 
lower  cost  than  the  particular  cost  shown  in  the 
plant. 

4.  Detection  of  Inefficiencies.  The  records  provide  for 
following  the  material  from  the  raw  state  until  it  becomes 
finished  product,  and  for  ascertaining  the  time,  labor,  and  ex- 
pense involved  in  its  manufacture.  In  this  way,  the  following 
inefficiencies  may  be  detected : 

(a)  Losses  of  material 

(b)  Wasted  time 

(c)  Defective  work 

(d)  Poor  supervision 

(e)  Various  other  "leaks" 

5.  Detailed  Inventories.  A  cost  system  provides  for 
keeping  perpetual  inventory  records  in  detail  of  raw  material, 
work  in  process,  finished  parts  stock,  and  finished  stock. 


lO  COST-FINDING  ELEMENTS  AND  METHODS 

These  records  provide  a  means  for  discovering  or  deter- 
mining : 

(a)  Losses  of  material, 

(b)  Obsolete  stock. 

(c)  Insurance  requirements  for  the  merchandise  in  the 

various  departments  of  the  plant. 

(d)  Information  for  the  purchasing  department  as  to 

the  quantities  of  materials  on  hand  and  the 
necessary  requirements. 

(e)  The  correct  quantities  of  product  which  must  be 

manufactured  in  order  to  maintain  stock  require- 
ments. 

(f )  Information  for  the  sales  department  as  to  deliver- 

ies on  orders. 
6.  Standardization  Data.     A  cost  system  supplies  the  in- 
formation necessary  for  standardizing  the  work  of  a  plant, 
which  might  include: 

(a)  Ascertaining  the  unit  of  production  upon  which  the 

various  departments  of  the  plant  may  operate 
efficiently,  thereby  keeping  the  various  operating 
departments  balanced  with  each  other. 

(b)  Changing  day-work  operations  to  piece-work  opera- 

tions, or  perhaps  to  the  premium  or  bonus  system 
of  paying  wages. 

(c)  Establishing  a  basis  for  a  planning  or  routing  sys- 

tem of  orders  in  the  various  departments. 
These  six  advantages  are  not  to  be  regarded  as  a  brief  for 
the  value  of  cost  systems,  but  rather  as  an  analysis  showing 
the  lines  along  which  a  cost  system  influences  the  business  or- 
ganization. 

Application  of  Cost  Principles 

The  principles  underlying  cost-finding  have  all  oeen  anal- 
yzed and  defined,  but  when  it  comes  to  the  actual  installation 


COST-FINDING  AND  ITS  FUNCTIONS  ii 

of  cost  systems,  the  greatest  skill  and  caution  must  be  observed 
in  applying  these  principles  to  the  conditions  that  exist.  No 
two  manufacturing  plants  are  alike,  even  in  the  same  line  of 
business.  Every  plant  has  peculiarities  that  bear  upon  the 
methods  of  cost-finding,  and  this  makes  each  factory  a  problem 
in  itself.  It  follows  that  in  either  writing  or  reading  a  treatise 
on  the  subject,  this  distinction  must  be  clearly  conceived.  The 
knowledge  of  principles,  without  a  corresponding  familiarity 
with  the  facts  and  conditions  of  manufacturing,  produces  the 
theoretical  cost-finder,  who  is  frequently  a  nuisance.  On  the 
other  hand,  it  is  only  the  shallow  thinker  who  trusts  to  a 
superficial  study  of  forms  and  accounting  practices,  with  the 
idea  that  such  knowledge  prepares  him  to  go  into  any  business 
and  install  a  cost  system.  To  attain  success  in  cost  work,  one 
must  understand  the  principles  of  cost  accounting  and  be 
familiar  with  the  conditions  which  actually  exist,  and  must 
apply  the  principles  so  as  to  fit  these  conditions. 

Uniform  Methods  of  Cost-Finding 

In  almost  every  line  of  manufacturing  industry  trade  asso- 
ciations have  been  formed,  and  during  the  last  ten  years  great 
progress  has  been  made  through  these  trade  associations  along 
efficiency  lines  in  buying,  in  manufacturing,  and  in  extending 
trade.  Furthermore,  a  valuable  end  has  been  served  in  pro- 
moting cordial  and  sympathetic  relations  among  the  various 
members  of  the  associations.  By  means  of  these  trade  asso- 
ciations, the  fact  has  been  proved  that  while  competition  is 
beneficial,  at  the  present  time  manufacturers  can  accomplish 
much  more  lasting  results  by  assisting  each  other  in  their 
problems  than  by  conducting  a  continuous  trade  warfare 
among  themselves. 

Out  of  the  work  of  the  trade  associations  has  grown  the 
idea  of  uniformity  of  cost-finding  methods.  In  this  connec- 
tion, the  expression  "uniform  cost  system"  has  been  used  fre- 


12  COST-FINDING  ELEMENTS  AND  METHODS 

quently  and  has  caused  considerable  misunderstanding  on  the 
part  of  manufacturers.  A  uniform  cost  system,  even  as 
applied  to  a  particular  line  of  industry,  is  impracticable  if  not 
impossible,  and  manufacturers  are  fully  conversant  with  this 
fact.  The  proper  phrase  to  use  is  "uniform  methods  of  cost- 
finding."  This  means  outlining  the  standard  principles  of  cost 
accounting  and,  from  these  principles,  arriving  at  uniform 
methods  of  treating  costs  as  applied  to  a  particular  industry. 
An  illustration  of  this  matter  may  be  given  in  connection  with 
the  manufacture  of  hosiery.  Some  plants  buy  their  yarn, 
others  manufacture  it;  some  send  out  their  goods  to  be  dyed, 
others  do  their  own  dyeing;  some  manufacture  cotton  goods, 
others  woolen  goods.  While  a  uniform  system  could  not  be 
applied,  uniform  methods  may  be  established  in  the  various 
plants  according  to  their  peculiar  conditions. 

The  greatest  advantage  to  be  derived  from  uniform  cost 
methods  is  that  of  insuring  a  more  uniform  selling  price.  This 
object  would  be  attained,  even  if  the  uniform  system  were  not 
as  scientific  as  it  should  be;  for  if  errors  were  made  through 
the  method  established,  all  manufacturers  would  at  least  be 
figuring  the  same  way,  all  would  be  making  the  same  mistakes, 
and  unfair  and  ignorant  competition  would  be  eliminated.  No 
one  questions  the  old  adage  that  competition  is  the  life  of  trade, 
but  the  majority  of  manufacturers  know  also  that. unfair  com- 
petition is  the  curse  of  trade.  No  one  should  dread  fair  com- 
petition, for  success  will  then  depend  on  his  own  organization. 
If  a  manufacturer  cannot  make  money  in  competition  with 
other  concerns  when  using  the  same  methods  of  figuring  costs, 
he  can  only  conclude  that  his  goods  or  his  marketing,  or  both 
of  them,  are  costing  him  too  much.  His  next  step,  naturally, 
is  to  analyze  closely  the  methods  and  conditions  under  which 
he  is  manufacturing  and  marketing  his  product,  until  he  finds 
and  corrects  the  inefficiencies  which  are  handicapping  him  so 
seriously. 


CHAPTER  II 

ELEMENTS  OF  COST 

Manufacturing  Costs 

Material,  labor,  and  expense  are  the  three  subdivisions  of 
manufacturing  costs  which  are  known  as  the  elements  of  costs. 
These  elements  may  be  grouped  under  the  two  following 
headings : 

1.  Direct  charges 

2.  Indirect  charges 

Direct  charges  consist  of  those  elements  of  costs  which, 
entering  into  and  forming  part  of  a  product,  can  be  charged 
directly  to  the  product.  These  direct  charges,  therefore,  in- 
clude : 

1.  Direct  material 

2.  Direct  labor 

3.  Direct  expense 

All  elements  of  costs  which  are  not  chargeable  directly 
to  the  product  fall  under  the  heading  of  indirect  charges  and 
include : 

1.  Indirect  material 

2.  Indirect  labor 

3.  Indirect  expense 

Direct  Material 

The  cost  of  the  substance  or  substances  from  which  a 
product  is  made,  is  the  direct  material  charge.  In  manufac- 
turing industries,  often  the  direct  material  charge  includes 
several  different  kinds  of  material.     For  example,  in  a  wood- 

13 


14 


COST-FINDING  ELEMENTS  AND  METHODS 


working  plant,  lumber,  hinges,  knobs,  locks,  paints,  oils,  and 
varnishes  may  all  be  used  in  the  construction  of  the  articles 
manufactured,  and  therefore,  the  direct  material  cost  would 
include  all  these  items.  Direct  material  should  be  charged 
either  to : 

1.  Some  definite  job,  order,  or  article 

2.  Some  definite  manufacturing  process 

However,  often  an  item  by  its  very  nature  may  be  a  direct 
material  cost  but,  from  a  practical  standpoint,  cannot  be 
charged  directly  to  the  product  and  therefore  is  included,  as 
indirect  material,  among  the  indirect  factory  expenses.  For 
example,  nails  and  screws  are  often  included  among  the  in- 
direct factory  expenses  in  wood-working  plants  because  it  is 
impracticable  to  charge  these  items  directly  to  the  cost  of  a 
particular  job,  order,  or  article. 

Also,  in  a  straw  hat  factory,  the  materials  that  enter 
directly  into  the  manufacture  of  the  hat  are  braid  or  straw,  the 
band,  the  sweat,  the  trimmings,  and  the  thread.  From  a  tech- 
nical standpoint,  this  thread  is  just  as  much  a  direct  material 
charge  as  the  band  or  trimmings,  but  it  would  cost  as  much 
to  find  out  the  amount  used  in  the  manfacture  of  a  dozen  hats 
as  the  thread  itself  costs.  It  is,  therefore,  usually  handled  as 
an  indirect  factory  expense  item  in  the  sewing  department  and 
is  distributed  and  charged  to  the  various  hats  on  the  basis  of 
the  number  of  hats  produced.  This  is  a  good  illustration  of 
applying  common-sense  instead  of  theory,  which  is  so  neces- 
sary at  times  in  cost-finding. 

On  the  other  hand,  certain  expense  items  are  often  in- 
cluded as  a  part  of  the  direct  material  charge.  For  instance, 
when  material  is  purchased  in  foreign  markets,  the  amount  of 
duty  and  import  expenses  should  be  added  to  the  foreign  cost 
of  the  material  in  order  to  ascertain  the  "landed  cost"  or 
direct  material  charge.     Also,  it  is  often  found  to  be  quite 


ELEMENTS  OF  COST  I5 

feasible  to  add  the  incoming  freight,  express,  and  cartage  cost 
directly  to  the  invoice  cost  of  material;  the  direct  material 
charge  then  including  the  material  cost  plus  cost  of  the  incom- 
ing freight,  express,  and  cartage. 

Direct  Labor 

That  portion  of  the  factory  wages  which  is  productive  in 
character  and  which  may  be  applied  directly  to  the  product  or 
to  the  manufacturing  process,  is  the  direct  labor  charge  and  is 
often  termed  the  productive  labor  charge.  Direct  labor  should 
be  charged  either  to : 

1.  Some  definite  job,  order,  or  article 

2.  Some  definite  manufacturing  process 

In  manufacturing  industries,  the  direct  labor  charge  is 
generally  subdivided  into  various  different  kinds  of  operations. 
For  example,  in  a  garment  industry  the  direct  labor  charge 
would  include  the  following  operations : 

1.  Cutting 

2.  Trimming 

3.  Hand  sewing 

4.  Machine  sewing 

5.  Ribboning 

6.  Inspecting 

7.  Pressing 

8.  Boxing 

Direct  Expense 

Any  other  expense  which  is  applicable  and  which  may  be 
charged  directly  to  a  job,  order,  or  article,  is  included  as  a 
direct  expense  charge.  Such  expenses  are  not  infrequent,  an 
example  being  the  transportation  and  hotel  expenses  of  fore- 
men and  workmen  engaged  on  out-of-town  special  construction 
orders.  Experimental  work  on  special  orders  is  often  included 
in  the  costs  under  the  caption  "direct  expense,"  although  items 


l6  COST-FINDING  ELEMENTS  AND  METHODS 

of  this  character  are  more  frequently  considered  part  of  the 
factory  indirect  expenses  and  distributed  over  the  entire  prod- 
uct manufactured. 

Indirect  Charges 

Indirect  charges  include  indirect  material,  indirect  labor, 
and  indirect  expenses.  These  indirect  charges  are  often 
termed  "factory  overhead,"  "indirect  factory  expenses," 
"manufacturing  expenses,"  "burden,"  or  "oncost."  Indirect 
charges  as  a  class  may  be  analyzed  under  the  two  following 
headings,  depending  upon  the  application  and  distribution  of 
the  items  composing  them  and  the  methods  of  apportioning 
and  distributing  them  to  job,  order,  or  article,  or  to  the  manu- 
facturing process : 

1.  Departmental  expenses,  which  include  those  expenses 

chargeable  to  definite  departments  of  the  factory 
because  they  are  incurred  in  these  definite  depart- 
ments. 

2.  General  operating  expenses,  which  include  those  ex- 

penses chargeable  either  over  the  entire  plant  or 
over  more  than  one  department  of  the  plant. 

The  items  composing  the  indirect  charges  will  necessarily 
vary  in  almost  every  factory,  but  the  following  classified  list 
includes  certain  items  which  invariably  appear  among  the  in- 
direct charges  of  a  plant: 

1.  Indirect  Material : 

Direct  material  which  cannot  be  applied  in  a  direct 

manner 
Supplies 
Scrap  material 
Small  tools 

2.  Indirect  Labor : 

Indirect  or  non-productive  labor 


ELEMENTS  OF  COST 


17 


Supervision  or  foremanship 

Superintendence 

Inspection,  when  not  considered  as  a  direct  labor 

charge 
Factory  clerks'  salaries 
Defective  work 
Experimental   work,   when   not   considered   as   a 

direct  labor  charge 
3.  Indirect  Expenses : 
Rent 

Insurance — fire  and  liability 
Taxes 
Interest 
Depreciation 

Maintenance,  repairs,  and  renewals 
Power 
Light 
Heat 
Freight  and  cartage  inward,  when  not  considered 

as  a  part  of  the  direct  material  charge 
Over,  short,  and  damage 
Miscellaneous  factory  expenses 

Packing  Expense 

The  cost  of  production,  or  the  factory  cost,  ends  when 
the  article  is  finished  and  ready  for  sale.  Therefore,  the  fac- 
tory costs  include  the  direct  material,  direct  or  productive 
labor,  direct  expense,  if  any,  and  the  indirect  charges.  In 
some  instances,  a  portion  of  the  packing  expense  is  included 
as  part  of  the  factory  cost.  When  the  finished  articles  are 
packed  uniformly  and  stored  in  the  finished  stock  warehouses, 
the  packing  department,  in  such  an  instance,  may  be  included 
as  a  factory  department  and  its  costs  considered  part  of  the 
factory  cost. 


l8  COST-FINDING  ELEMENTS  AND  METHODS 

Selling  Expenses 

The  items  which  are  generally  included  among  the  selling 
expenses  are  the  following: 

Advertising  or  advertising  department  expenses 

Sample  expenses 

Commissions 

Salesmen's  salaries 

Salesmen's  expenses 

Traveling  expenses 

Sales  office  expenses: 
Rent 

Clerks'  salaries 
Telephone  and  telegraph 
Printing  and  stationery- 
Postage 
Miscellaneous  expenses 

Freight  and  cartage  outward 

Shipping  department  expenses  and  finished  stock  ware- 
house expenses  may  also  form  a  part  of  the  selling  expenses. 
The  selling  expenses  have  no  direct  bearing  upon  the  produc- 
tion or  factory  costs  of  the  article,  but  provision  must  be 
made  to  cover  them  when  determining  the  price  for  which 
the  article  will  sell. 

Administrative  Expenses 

The  segregation  of  the  administrative  expenses  as  a  dis- 
tinct group  is  sometimes  a  difficult  matter.  In  the  majority  of 
cases  the  time  of  the  administrative  force  is  spent  in  super- 
vising the  selling  organizations,  in  solving  factory  problems  of 
production  and  labor  conditions,  and  in  looking  after  the 
finances  of  the  business.  Therefore,  administrative  expenses 
often  are  partly  production  or  factory  costs  and  partly  selling 
and  administrative  costs,  and  it  is  necessary  to  make  an  arbi- 


ELEMENTS  OF  COST 


19 


trary  distribution  of  them  so  that  the  factory  and  sales  depart- 
ments will  be  charged  with  proportionate  amounts.  In  any 
event,  before  determining  the  selling  price  of  the  article,  pro- 
vision must  be  made  for  covering  these  administrative  ex- 
penses. 

The  following  items  are  generally  included  among  the  ad- 
ministrative expenses : 

Officers'  salaries 
Executives'  expenses 
Auditing  expenses 
Legal  expenses 
Administrative  office  expenses: 

Salaries 

Rent 
•       Light  and  heat 

Telephone  and  telegraph 

Printing  and  Stationery 

Postage 

Office  supplies 

Miscellaneous  expenses 

Selling  Price 

Before  determining  the  selling  price  of  an  article  con- 
sideration must  be  given  to  the  various  elements  of  costs  and 
expenses  which  have  been  classified  as : 

1.  Direct  material 

2.  Direct  labor 

3.  Direct  expenses 

4.  Indirect  charges 

5.  Selling  expenses 

6.  Administrative  expenses 

Prime  Cost.  The  sum  of  the  direct  material  cost  plus  the 
direct  labor  cost  is  known  as  the  prime  cost. 


20 


COST-FINDING  ELEMENTS  AND  METHODS 


Factory  Cost.  The  sum  of  the  prime  cost  plus  the  in- 
direct charges  is  known  as  the  factory  cost. 

Total  Cost.  The  sum  of  the  factory  cost  plus  the  sell- 
ing expenses  and  the  administrative  expenses  is  known  as  the 
total  cost. 

Selling  Price.  The  sum  of  the  total  cost  plus  the  profit 
is  known  as  the  selling  price. 

These  gradations  of  cost  may  be  further  illustrated  by 
means  of  the  following  simple  diagram  (Form  i),  which  illus- 
trates the  steps  leading  from  the  material  cost  to  the  selling 
price. 


Profit 
25    cents 

« 

Selling 
Price 

$i.7S 

Selling  and 
Administra- 
tive 
Expenses 
25   cents 

Factory 
Cost 
$i.as 

Total  Cost 
I1.50 

Indirect 
Charges 
50    cents 

Direct 

Labor  Cost 

50    cents 

Prime   Cost 
7S    cents 

DiRZCT 

Material 

Cost 
2S    cents 

Form  I.    Diagram  Showing  Relation  of  Cost  Elements  to  Selling  Price 


ELEMENTS  OF  COST  2T 

Deductions 

In  practice  it  is  customary  to  allow  certain  deductions 
from  the  established  selling  prices,  or  from  the  established 
purchasing  prices.     These  deductions  include : 

1.  Trade  discounts 

2.  Allowances 

3.  Rebates 

4.  Cash  discount 

As  a  rule,  the  trade  discounts  are  deducted  directly  upon 
the  invoices  rendered,  and  therefore  do  not  enter  into  the 
account-keeping  of  the  seller  or  purchaser. 

Allowances  to  customers  are  treated  as  deductions  from 
sales,  though  in  some  cases  these  items  are  included  among 
selling  expenses.  Allowances  received  from  creditors  are 
generally  considered  as  direct  deductions  from  the  invoice 
values  and  treated  accordingly.  It  is  quite  customary  to  delay 
the  passing  of  disputed  invoices  for  account-keeping  until  all 
legitimate  allowances  have  been  deducted. 

Special  rebates  allowed  customers  at  the  end  of  a  definite 
period  or  after  the  expiration  of  a  specified  contract,  may 
be  treated  usually  as  miscellaneous  deductions  from  income. 
In  some  instances  these  items  may  be  considered  as  deduction?, 
from  sales.  Similar  rebates  received  by  the  purchaser  may 
be  treated  either  as  miscellaneous  income  or  as  deductions 
from  cost.  However,  it  is  often  very  impracticable  to  treat 
items  of  this  character  as  deductions  from  cost  because,  in 
the  operation  of  the  cost  system,  it  may  be  necessary  to  use 
the  cost  values  shown  upon  original  invoices — this  because  the 
amount  of  the  rebates  deductible  cannot  be  definitely  ascer- 
tained until  the  expiration  of  a  particular  period. 

Cash  discounts  allowed  and  received  are  items  which 
are  treated  in  various  ways  in  practice.  In  some  instances, 
they  form  part  of  the  capital  expense  and  capital  income,  bc' 


22 


COST-FINDING  ELEMENTS  AND  METHODS 


Factory 
Cost 


TOTAL  COST 


Selling 
Ex- 
penses 


Prime   /I.  Direct  Material 
Cost      \2.  Direct  Labor 


Indirect 
Charges 


1.  Indirect 
Material 


2.  Indirect 
Labor 


3.  Indirect 
Expenses 


Material  which  cannot  be  applied  in  a 

direct  manner 
Supplies 
Scrap  Material 
Small  Tools  and  Dies 

Indirect  or  Non-Productive  Labor 

Sup>ervision  or  Foremanship 

Sujjerintendence 

Inspection  (when  not  considered  as  a 

direct  labor  charge. 
Factory  Clerks'  Salaries 
Defective  Work 
Experimental  Work 

Rent 

Insurance — ^Fire  and  Liability 

Taxes 

Interest 

Depreciation 

Maintenance,  Repairs,  and  Renewals 

Power 

Light 

Heat 

Freight   and   Cartage    Inward    (when 

not   considered    as    part   of   direct 

material  charge) 
Over,  Short,  and  Damage 
Miscellaneous  Factory  Expenses 


Adminis- 
trative 
Expenses 


Advertising 
Sample  Expense 
Commissions 
Salesmen's  Salaries 
Salesmen's  Expenses 
Traveling  Expenses 
Sales  Office  Expenses 

Rent 

Clerks'  Salaries 

Telephone  and  Telegraph 

Printing  and  Stationery 

Postage 

Miscellaneous  Expenses 
Freight  and  Cartage  Outward 
Shipping  Department  Expenses 
Finished  Stock  Warehouse  Expenses 

'  Officers'  Salaries 
Office  Salaries 
Executives'  Exp>enses 
Auditing  Expenses 
Legal  Expenses 
Administrative  OfiSce  Expenses 

Salaries 

Rent 

Light  and  Heat 

Telephone  and  Telegraph 

Printing  and  Stationery 

Postage 

Office  Supplies 

Miscellaneous  Exp>enses 


Total  Cost-|-Profit=Selling  Price 


Form  2.    Chart  Showing  Analysis  of  Cost  Elements 


ELEMENTS   OF  COST  23 

ing  included  as  deductions  from,  and  additions  to,  income.  In 
other  instances,  they  are  deducted  from  sales  prices  and  the 
purchase  prices.  When  fixing  selling  prices,  these  miscella- 
neous items  should  also  be  considered  as  well  as  the  elements  of 
cost  and  the  selling  and  administrative  expenses. 

Analysis  of  Elements  of  Cost 

Form  2  shows  the  items  which  should  be  considered  in 
fixing  a  selling  price. 


CHAPTER  III 

GENERAL  METHODS  OF  COST-FINDING 

Requirements  of  Cost-Finding 

As  costs  furnish  the  basis  for  determining  the  selling 
prices  of  the  manufactured  product,  they  naturally  should  be 
compiled  so  that  the  total  cost  of  the  job,  order,  or  article  may 
be  readily  ascertained. 

Actual  conditions  in  manufacturing  determine  the  sys- 
tem of  cost-finding  to  be  used,  which  should  include : 

1.  A  method  of  ascertaining  or  reporting  the  material, 

labor,  and  overhead  costs. 

2.  A  method  of  compiling  these  elements  of  cost. 

3.  A  method  of  determining  the  total  cost  of  the  job, 

order,  or  article. 

For  present  purposes  the  actual  conditions  which  exist 
in  manufacturing  industries  may  be  grouped  or  summarized 
in  two  general  classes,  and  the  methods  of  cost-finding 
applicable  to  these  two  classes  may  be  designated  as  follows : 

1.  Order  method  of  cost-finding 

2.  Process  method  of  cost-finding 

Order  Method  of  Cost-Finding 

Distinctive  Features  of  Order  Method 

When  the  order  is  the  tangible  basis  upon  which  the  ele- 
ments of  cost  are  charged,  compiled,  and  determined,  the 
order  method  of  cost-finding  is  generally  used.  In  other 
words,  under  such  conditions  the  material  costs,  labor  costs, 

24 


GENERAL  METHODS  25 

and  a  pro  rata  share  of  the  factory  overhead  are  all  charged 
to  definite  factory  orders,  and  the  elements  of  material,  labor, 
and  overhead  costs  are  compiled  so  that  the  total  factory  cost 
of  each  individual  order  may  be  determined.  If  a  number  of 
units  are  manufactured  under  the  definite  factory  order,  the 
unit  article  cost  may  be  determined  by  dividing  the  total  fac- 
tory cost  by  the  total  quantity  manufactured  or  produced. 
Definite  factory  orders  may  be  issued  for  the  manufacture  of 
a  number  of  units,  for  a  single  unit,  or  for  the  manufacture 
of  certain  parts  of  a  unit. 

The  order  method  of  cost-finding  is  often  designated  by 
other  terms,  such  as: 

Special-order  method  of  cost-finding 
Specific-order  method  of  cost-finding 
Job  method  of  cost-finding 

However,  in  all  industries  in  which  a  definite  job  or  order 
furnishes  the  basis  for  the  compilation  of  the  cost  of  the 
article,  this  method  of  cost-finding  may  be  used,  and  in  view  of 
the  fact  that  it  includes  the  issuance  of  orders  for  the  manu- 
facture and  production  of  standard  articles,  as  well  as  for 
special  articles,  it  is  most  accurately  described  by  the  term 
"order  method  of  cost-finding."  Examples  of  the  applicability 
of  the  method  to  specific  trades  and  industries  are  given  below. 

Construction  Work 

A  good  example  of  an  industry  in  which  the  order 
method  of  cost-finding  may  be  applied  is  the  building  trade. 
This  includes  building  contractors  of  various  kinds,  such  as 
general  building,  iron  and  steel,  foundation,  masonry  and 
stone-work,  carpenter,  plastering,  electrical,  plumbing,  and 
heating  contractors,  and  various  subcontractors. 

In  this  class  of  industries  each  job,  or  order,  is  treated 
separately  and  the  material,   labor,   and  overhead  costs  are 


26  COST-FINDING  ELEMENTS  AND  METHODS 

ascertained  for  each  job  independently  of  the  costs  applicable 
to  any  other  job.  Therefore,  the  order  method  of  cost-finding 
is  suitable  and  may  be  applied  very  readily. 

Repair  Shops 

In  repair  shops,  which  may  include  garages,  wagon  re- 
pairs, and  machine  shops  doing  repair  work,  the  material, 
labor,  and  overhead  costs  are  ascertained,  compiled,  and  de- 
termined for  each  job  separately,  and  the  bill  to  the  customer 
is  prepared  with  this  cost  information  as  a  basis;  therefore 
the  order  method  of  cost-finding  may  be  used. 

Plating  Shops 

There  exists,  throughout  the  country,  a  considerable 
number  of  plating  shops  doing  a  so-called  special-order  busi- 
ness. In  these,  the  material,  labor,  and  overhead  costs  of 
each  individual  job  are  necessarily  ascertained  independently 
so  that  the  proper  charge  may  be  made  to  each  customer  for 
his  particular  job  or  order.  The  order  method  of  cost-finding 
may  be  here  used  satisfactorily. 

Attention  is  called  to  the  fact  that  this  classification  does 
not  include  the  plating  departments  of  large  concerns  which 
have  their  product  standardized  to  such  an  extent  that  the 
plating  operations  become  continuous  for  long  periods  of  time. 
When  these  conditions  exist,  the  order  method  of  cost-finding 
cannot  well  be  applied,  and  the  process  method  must  be  used 
to  ascertain  accurate  costs. 

Cabinet  Shops 

Considerable  special  job  work  is  done  in  various  kinds  of 
cabinet  shops.  These  shops  manufacture,  or  build,  only  on 
order;  that  is,  they  construct  various  kinds  of  furniture,  fix- 
tures, and  equipment  to  meet  the  individual  requirements  of 
each  customer.     Each  job,  therefore,  is  handled  as  a  separate 


GENERAL  METHODS  27 

unit,  bears  no  relation  to  any  other  piece  of  work  in  the  shop, 
and  the  elements  of  cost  for  each  must  be  determined  sepa-^ 
rately. 

Garment  Manufacturing  Plants 

On  account  of  the  change  in  styles  each  season,  the  gar- 
ment industries  manufacture  on  more  or  less  definite  demand, 
and  manufacturing  is  started  with  the  issuance  of  orders  for 
definite  styles  and  quantities.  As  these  definite  orders  furnish 
the  basis  upon  which  the  costs  are  calculated,  the  order  method 
of  cost-finding  is  used  most  advantageously.  Each  order  for 
the  production  of  a  definite  quantity  of  a  particular  style  of 
garment  is  charged  with  material,  labor,  and  a  proportion  of 
the  overhead  cost;  and  the  article  or  single  garment  cost  is 
ascertained  by  dividing  the  total  cost  of  the  order  by  the  num- 
ber of  garments  produced.  Garment  manufacturing  industries 
include  the  manufacture  of  cloaks  and  suits ;  coats,  waists  and 
dresses;  underwear;  gowns  and  evening  dresses. 

In  some  of  the  garment  manufacturing  industries,  the 
product  is  standardized  and  the  same  articles  are  manufactured 
continuously  day  after  day.  Under  such  conditions,  the  in- 
dividual order  cannot  be  used  as  a  cost-finding  basis  for  the 
reason  that  it  loses  its  identity  during  the  regular  daily  routine 
of  manufacture.  It  is  then  more  feasible  to  use  the  process 
method  of  cost-finding  to  ascertain  reliable  and  accurate  article 
costs. 

Straw  and  Felt  Hat  Plants 

Straw  and  felt  hat  plants  are  also  affected  by  changes  in 
styles,  and  these  changes  in  styles  are  reflected  in  the  volume 
and  kind  or  orders  received.  The  definite  order,  then,  fur- 
nishes the  basis  on  which  the  article  cost  is  compiled  and  ascer- 
tained. 

However,  in  industries  of  this  character  certain  depart- 


28  COST-FINDING  ELEMENTS  AND  METHODS 

ments  may  be  so  constituted  that  their  costs  are  more  readily 
ascertained  by  the  process  method  of  cost-finding.  For  ex- 
ample, certain  treating  processes  may  be  used  for  all  braids 
arid  felts  of  a  particular  kind  regardless  of  the  production 
orders,  and  in  departments  where  such  conditions  exist  the 
process  method  is  used  for  ascertaining  costs. 

Boot  and  Shoe  Plants 

In  these  industries,  again,  the  styles  are  a  governing  fac- 
tor as  to  the  quantity  and  kind  of  production  which  should  be 
manufactured  during  a  particular  season.  The  order,  there- 
fore, furnishes  the  basis  for  reporting,  compiling,  and  ascer- 
taining the  article  costs  in  most  of  the  boot  and  shoe  plants. 

Standardized  articles  and  a  large  volume  of  production 
may  change  manufacturing  conditions  to  such  an  extent  that 
the  process  method  of  cost-finding  can  be  used  more  advan- 
tageously. However,  before  the  process  method  of  cost-find- 
ing becomes  the  more  practical  method,  the  identity  of  the  in- 
dividual factory  orders  must  be  lost  in  the  large  volume  of 
factory  production  which  is  continuous  day  after  day. 

Wood-working  Plants 

In  wood-working  plants,  after  the  lumber  is  cut  and  ma- 
chined, it  is,  as  a  rule,  chargeable  to  some  particular  factory 
order.  These  factory  orders  may  be  for  standard  articles  or 
they  may  be  for  special  work  to  meet  the  requirements  of  cer- 
tain customers.  In  the  departments  in  which  the  material, 
labor,  and  overhead  costs  can  be  applied  to  definite  factory 
orders,  the  order  method  of  cost-finding  may  be  used  to  advan- 
tage. 

Metal-vs^orking  Plants 

In  metal-working  plants  it  is  the  practice  to  charge  the 
cost  of  the  castings  to  a  factory  order  or  to  some  definite  job. 


GENERAL  METHODS 


29 


This  is  invariably  the  case  where  definite  factory  orders  can 
be  used  as  a  basis  for  reporting  and  compiHng  the  material, 
labor,  and  overhead  costs.  Under  these  circumstances  the 
order  method  of  cost-finding  may  be  used  to  advantage  either 
in  those  plants  in  which  standard  articles  are  produced,  or  in 
which  special  articles  are  made  to  meet  customers'  require- 
ments. In  metal-working  plants  producing  large  quantities 
of  similar  articles  for  stock  the  process  method  of  cost-find- 
ing may  be  applied  to  the  product. 

Assembling  Departments 

The  order  method  of  cost-finding  may  be  used  advan- 
tageously in  the  assembling  departments  of  various  manufac- 
turing plants.  This  is  true  even  though,  preparatory  to  assem- 
bling, the  plant  may  manufacture  numerous  small  parts  the 
cost  of  which  can  only  be  compiled  by  the  process  method  of 
cost-finding. 

In  the  assembling  department  definite  orders  are  usually 
issued  for  the  production  of  fixed  quantities  of  articles.  These 
orders  may  be  for  a  standard  product  or  for  a  special  product, 
and  in  either  case  the  particular  order  or  job  may  be  taken  as 
a  basis  for  reporting  and  compiling  the  elements  of  cost. 

Process  Method  of  Cost-Finding 

Distinctive  Features  of  Process  Method 

Whenever  the  process  of  manufacture  is  continuous  for 
regular  periods  of  time  so  that  the  definite  factory  orders  and 
jobs  lose  their  identity  and  become  part  of  a  large  volume  of 
production,  the  material,  labor,  and  overhead  costs  are  charge- 
able to  the  definite  processes  or  operations  and  the  process 
method  of  cost-finding  is  used. 

This  method  is  sometimes  called  the  "product  method  of 


30  COST-FINDING  ELEMENTS  AND  METHODS 

cost-finding."  However,  in  view  of  the  fact  that  the  word 
"product"  refers  more  particularly  to  article  rather  than 
operation,  the  designation  "process  method  of  cost-finding" 
is  more  explicit  and  is  preferable.  This  term  includes 
the  method  commonly  known  as  the  "machine-cost  method," 
for  the  reason  that  the  same  general  principles  of  cost-finding 
apply. 

After  the  material,  labor,  and  overhead  costs  and  the 
total  cost  of  the  various  processes  or  operations  are  ascertained, 
these  should  be  summarized  and  redistributed  so  that  the  job, 
order,  or  article  cost  may  be  determined,  usually  on  the  basis 
of  volume.  The  quantities  which  are  used  as  the  basis  are  the 
weight,  the  number  of  units,  or  the  measurements  of  the  va- 
rious jobs,  orders,  or  articles;  in  other  words,  tons,  pounds, 
gross,  dozens,  yards,  feet,  etc. 

Foundries 

A  common  industry  where  the  process  method  of  cost- 
finding  may  be  used  to  advantage  is  the  foundry.  This  in- 
cludes iron  foundries,  brass  foundries,  and  various  other  metal 
foundries.  In  these,  the  melting  operation  is  continuous  for 
regular  periods  of  time  and  no  reference  is  made  to  the  definite 
orders  or  jobs  because  their  identity  cannot  be  ascertained 
readily.  In  operation,  the  material,  labor,  and  overhead  costs 
are  all  charged  to  the  cupola,  and  at  the  end  of  a  definite  period, 
when  the  total  production  is  ascertained,  the  castings  cost  per 
pound  can  be  determined. 

Paper  Mills 

The  material,  labor,  and  overhead  costs  in  the  manufac- 
ture of  paper  are  chargeable  to  the  milling  processes.  The 
total  quantity  or  the  total  number  of  pounds  of  paper  manu- 
factured at  the  end  of  a  definite  period  is  determined,  and  the 
cost  of  the  paper  per  pound  is  then  computed. 


GENERAL  METHODS  3I 

Paint  and  Varnish  Manufacturing  Plants 

In  small  paint  and  varnish  manufacturing  plants,  the 
material  cost  may  be  applied  to  the  various  batches  definitely, 
as  the  identity  of  each  batch  can  always  be  ascertained  and 
the  materials  which  are  put  into  each  are  counted  or  weighed. 
Under  these  conditions  the  order  method  of  cost-finding  may 
be  used. 

However,  if  much  red  tape  is  involved  in  ascertaining 
the  labor  and  overhead  cost  applicable  to  each  particular 
batch,  the  labor  cost  and  overhead  cost  of  the  various  batches 
should,  as  a  rule,  be  ascertained  according  to  the  grocess 
method  of  cost-finding. 

Chemical  Manufacturing  Plants 

In  chemical  manufacturing  plants,  continuous  operations 
are  carried  on  for  regular  periods  of  time  and,  as  the  material, 
labor,  and  overhead  costs  are  applicable  and  chargeable  to  the 
processes,  the  unit  or  article  cost  can  only  be  ascertained  after 
the  definite  quantity  of  production  is  known. 

In  small  chemical  manufacturing  plants,  where  the  volume 
of  production  is  not  large  and  where  definite  small  orders  are 
manufactured  specially  for  various  customers,  it  may  be  pos- 
sible to  use  the  order  method  of  cost-finding  to  advantage. 

Rubber  and  Celluloid  Manufacturing  Plants 

The  manufacture  of  rubber  and  celluloid  calls  for  condi- 
tions in  which  the  process  method  of  cost-finding  can  be  em- 
ployed advantageously.  The  identity  of  individual  orders  or 
jobs  is  entirely  lost  as  the  process  of  manufacturing  is  con- 
tinued for  regular  periods  of  time.  The  materials  which  enter 
into  the  manufacturing  processes  are  weighed  and  counted, 
and  charged  to  the  particular  process.  The  labor  and  over- 
head costs  are  also  charged  to  definite  processes  and,  after  the 
total  production  is  obtained,  the  unit  cost  is  found. 


32  COST-FINDING  ELEMENTS  AND  METHODS 

Manufacture  of  Foodstuffs 

In  plants  where  foodstuffs  are  manufactured  and  the  proc- 
ess of  manufacturing  is  continuous,  the  identity  of  definite 
orders  cannot  be  readily  ascertained  without  interfering  with 
production.  Therefore  the  process  method  is  used,  the  mate- 
rial, labor,  and  overhead  costs  being  charged  to  the  various 
processes  of  manufacture. 

Coal-Mining 

Coal-mining  affords  a  common  example  of  the  process 
method  of  cost-finding.  The  labor  and  overhead  cost  are 
charged  to  the  definite  operations,  and,  when  the  production  or 
total  quantity  of  coal  mined  is  known,  the  unit  cost  per  ton  is 
determined. 

Ice  Manufacturing  Plants 

In  the  manufacture  of  ice,  the  process  method  of  cost- 
finding  is  used,  the  material,  labor,  and  overhead  costs  being 
charged  to  the  manufacturing  processes.  When  the  total 
quantity  of  ice  produced  is  known,  the  cost  per  ton  of  ice 
manufactured  can  be  ascertained. 

Treating  Departments 

All  the  product  used  in  textile  mills,  metal  plants,  wood- 
working plants,  and  straw  hat  plants  undergoes  a  special  proc- 
ess or  is  treated  in  a  certain  way  in  particular  departments. 
In  such  treating  departments  the  process  method  of  cost-find- 
ing is  employed  and  the  treating  cost  for  each  article  is  ascer- 
tained after  the  quantity  treated  is  known. 

Cutting  and  Machining  Department — Wood- Working  Plants 

In  wood-working  industries   where   large   quantities  of 

standard  product  are  manufactured,  the  costs  of  cutting  and 

machining  operations  may  be  ascertained  according  to  the  proc- 


GENERAL  METHODS 


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34  COST-FINDING  ELEMENTS  AND  METHODS 

ess  method  of  cost-finding.  This  may  be  done  in  cases  where 
large  quantities  of  lumber  for  the  standard  product  are  cut  and 
machined  in  the  same  manner  for  regular  periods  of  time. 

The  material,  labor,  and  overhead  costs  are  charged  to 
the  various  cutting  and  machining  operations,  and,  after  the 
total  quantities  produced  are  ascertained,  the  unit  article  cost 
is  determined. 

Summary  of  Cost-Finding  Methods 

Form  3  shows  in  summarized  form  the  two  basic  methods 
of  cost-finding  and  the  industries,  or  departments  within  a 
plant,  to  which  they  are  applicable  under  the  conditions  al- 
ready described. 


CHAPTER  IV 

DEPARTMENTAL  AND  PRODUCT 
CLASSIFICATION 

Factory  Departments 

Before  it  can  be  decided  which  method  of  cost-finding 
may  be  used  in  any  particular  plant,  the  manufacturing  depart- 
ments of  the  plant  must  be  classified.  In  some  industries  the 
order  method  of  cost-finding  might  be  applicable  to  certain  de- 
partments, and  the  process  method  of  cost-finding  might  be 
applicable  to  the  remaining  departments.  It  is  not  an  unusual 
condition  to  find  both  methods  of  cost-finding  used  in  the 
operating  departments  of  a  plant.  The  classification  of  fac- 
tory departments  also  plays  a  very  important  part  in  ascertain- 
ing costs,  because  the  departments  furnish  the  basis  for  the 
cost  reports  and  also  for  the  cost  accounts. 

The  various  elements  of  cost — material,  labor,  and  over- 
head— are  compiled  and  proved  for  each  factory  department, 
and  the  costs  thus  grouped  can  be  proved  with  a  greater  de- 
gree of  accuracy  for  each  department  than  would  otherwise  be 
possible. 

The  operating  departments  of  all  factories  cannot  be  clas- 
sified in  the  same  manner,  though  most  factories  are  so  organ- 
ized that  they  may  be  divided  into  four  main  sections : 

1.  Raw  material  and  supplies  storerooms 

2.  Manufacturing  departments 

3.  Finished  parts  storerooms 

4.  Finished  stock  storerooms 

For  cost  purposes,  a  still  more  important  classification  is 
that  based  on  the  relation  of  the  factory  departments  to  the 

35 


36  COST-FINDING  ELEMENTS  AND  METHODS 

output  of  the  plant  and  on  this  basis  they  may  be  grouped  and 
classified  under  the  three  following  headings : 

1.  Productive  departments 

2.  Non-productive  departments 

3.  Miscellaneous  departments 

Productive  Departments 

The  productive  departments  include  those  manufacturing 
departments  that  do  the  actual  work  upon  the  product.  This 
would  include  work  upon  the  different  parts  which  will  eventu- 
ally be  combined  to  form  the  completed  article ;  it  may  include 
work  upon  items  of  material  which  will  be  returned  to  stores 
and  later  be  requisitioned  out  as  raw  material ;  and  it  may  in- 
clude actual  productive  operations  upon  articles  which  will  be 
stored  in  a  semi-completed  state  to  be  made  into  the  completed 
articles  at  a  later  date. 

The  productive  labor  element  of  cost  is  classified  by  opera- 
tions as  milling,  graining,  filling,  etc.,  and  each  productive 
operation  is  known  by  some  definite  term.  The  sequence,  re- 
lation, or  uniformity  of  these  productive  labor  operations 
usually  furnishes  the  basis  for  establishing  productive  depart- 
ments in  the  factory.  The  sphere  of  a  productive  department 
may  be  limited  to  a  "center"  from  which  the  productive  work 
is  reported.  For  example,  certain  labor  operations  which  are 
closely  related  as  to  the  men  and  machines  employed  may  be 
grouped  to  form  a  particular  department,  or  "center"  from 
which  the  work  is  reported  after  the  final  operation  in  that 
department  has  been  completed.  In  other  words,  after  a  cer- 
tain number  of  operations  are  completed,  an  inspection  or  a 
count  of  the  articles  manufactured  is  made,  and  the  quantity 
produced  is  reported. 

To  sum  up,  productive  departments  are  established  after 
considering  first  the  actual  work  done  upon  the  product; 
secondly,  the  relation  or  uniformity  of  the  productive  labor 


DEPARTMENTAL  CLASSIFICATION  37 

operations;  and  thirdly,  the  basis  for  reporting  production. 
When  dividing  the  factory  into  its  departments  the  aim 
should  be  to  split  it  up,  so  far  as  possible,  into  uniform  and 
connected  operations  which  represent  distinct  steps  in  the 
progress  of  the  product  through  the  factory. 

Designation  of  Departmental  Divisions 

Productive  departments,  and  the  operations  in  these  de- 
partments, should  be  given  distinctive  names  and,  if  possible, 
be  designated  by  distinctive  symbols.  The  names  and  number 
of  productive  departments  in  a  particular  factory  depend  upon 
the  nature  of  the  work  and  the  size  of  the  plant,  but  the 
departmental  classification  may  differ  in  factories  turning  out 
similar  products.  The  following  lists  show  fairly  typical  de- 
partmental divisions. 

Furniture  factory: 

1.  Cutting  department 

2.  Machining  department 

3.  Cabinet  shop — special  work 

4.  Cabinet  shop — standard  work 

5.  Paint  and  varnish  department 

6.  Trimming  department 

7.  Inspecting  department 
Metal-working  plant: 

.1.  Iron  foundry 

2.  Brass  foundry 

3.  Machining  standard  castings 

4.  Machining  special  castings 

5.  Plating  department 

6.  Assembling  department 

7.  Inspecting  department 
Garment  factory: 

1.  Cutting  department 

2.  Hand-sewing  department 


38  COST-FINDING  ELEMENTS  AND  METHODS 

3.  Machine-sewing  department 

4.  Trimming  department 

5.  Inspecting  department  • 

6.  Pressing  and  boxing  department 

Non-Productive  Departments 

The  non-productive  departments  of  a  factory  are  those 
in  which  the  work  done  is  only  incidental  to,  or  has  an  indirect 
relation  to  the  product  manufactured,  as  for  instance  the  power 
plant  or  storerooms.  These  departments  furnish  centers  about 
which  the  various  elements  of  factory  overhead  arising  therein 
or  applicable  thereto  may  be  compiled.  The  total  factory  in- 
direct expenses  arising  in,  or  applicable  to,  the  non-productive 
departments  is  ascertained  and  is  then  redistributed  to  the 
productive  departments,  for  the  reason  that  all  factory  ex- 
penses must  eventually  be  charged  to  the  productive  depart- 
ments in  order  to  reach  the  definite  jobs,  orders,  articles,  or 
processes  to  which  they  properly  apply. 

The  non-productive  departments  are  more  or  less  the  same 
in  different  industries,  and  the  following  Hst  covers  those 
usually  found  in  a  well-organized  plant: 

1.  Power  plant 

2.  Purchasing  department 

3.  Receiving  department 

4.  Storerooms 

5.  Engineering  and  drafting  room 

6.  Cost  department 

7.  Planning  and  routing  department 

8.  Employment  department 

When  inspection  and  experimental  work  involved  in  pro- 
duction cannot  be  charged  to  jobs,  orders,  or  articles,  the  ex- 
pense of  such  work  may  be  departmentalized  and  treated  as 
that  of  a  non-productive  department. 


DEPARTMENTAL  CLASSIFICATION  39 

Miscellaneous  Departments 

In  many  manufacturing  plants  the  work  of  some  depart- 
ments is  partly  productive  and  partly  non-productive.  A  pat- 
tern or  tool  room,  for  example,  may  make  patterns  or  tools 
chargeable  to  a  specific  job  or  order  and  make  other  patterns 
or  tools  chargeable  to  the  factory  overhead;  or  a  mechanical 
department  may  construct  machinery,  fixtures,  and  equipment 
for  sale  or  for  the  use  of  the  factory  itself — in  which  case  their 
cost  is  to  be  capitalized  among  the  fixed  assets  of  the  business; 
or  such  a  department  may  also  do  work  which  is  purely  inci- 
dental to  production,  such  as  repairs  and  maintenance — the 
cost  of  these  items  forming  part  of  the  indirect  or  administra- 
tive expenses  of  the  factory.  In  such  cases,  on  account  of  the 
two-fold  character  of  the  departmental  work,  a  separate  clas- 
sification must  be  provided  and  they  are  usually  known  as  mis- 
cellaneous departments. 

Miscellaneous  departments  usually  include: 

1.  Mechanical,  millwright,  or  repair  department 

2.  Pattern  department 

3.  Tool  room 

Under  some  conditions,  these  miscellaneous  departments 
may  be  advantageously  classified  as  productive  departments. 
When  this  is  the  case  these  departments  should  receive  credit 
for  (i)  all  work  done  upon  the  product,  (2)  the  cost  of  any 
construction  work  such  as  the  manufacture  of  machinery,  fix- 
tures, and  equipment  for  factory  use,  and  (3)  any  repair  and 
maintenance  work  chargeable  to  overhead.  In  most  cases, 
however,  the  work  of  miscellaneous  departments  is  largely 
non-productive,  in  which  case  it  is  absorbed  in  the  factory 
overhead  in  the  usual  way. 

General  Operating  Expenses  , 

All  items  of  overhead  should  be  distributed  to  the  depart- 
ments which  benefit  from  the  expenditures,  whenever  this  is 


40 


COST-FINDING  ELEMENTS  AND  METHODS 


possible.  In  large  plants,  however,  not  all  expenditures  can 
be  assigned  in  this  way.  Some  of  them,  such  as  repairs  to 
factory  sidewalks,  tramways,  general  yard  work,  general 
superintendents'  salaries  and  expenses,  production  managers' 
salaries  and  expenses,  and  so  on,  are  obviously  incurred,  not 
for  the  benefit  of  one  or  more  departments,  but  for  the  plant 
as  a  whole. 

Expenses  of  this  character  are  considered  as  general 
operating  expenses,  and  are  treated  in  the  same  manner  as 
costs  which  are  applicable  to  the  non-productive  departments. 
To  dispose  of  these  expenses  so  that  they  will  eventually  be 
absorbed  in  the  cost  of  the  product  manufactured,  they  may 
be  charged  in  the  article  cost  as  a  separate  item  of  overhead, 
or  provision  may  be  made  for  distributing  them  over  the  va- 
rious departments  of  the  plant. 

Summary  of  Departmental  Classification 

Form  4  shows  the  classification  of  various  factory  depart- 
ments in  summarized  form. 

Classification  of  the  Product  i 

One  of  the  objects  of  operating  a  cost  system  is  to  deter- 
mine the  profits  on  the  various  classes  of  product  manufac- 
tured. Year  by  year  the  variety  of  articles  placed  on  the 
market  increases  and  experts  have  gone  so  far  as  to  say  that 
many  inefficiencies  and  losses  are  due  to  the  fact  that  too  wide 
a  range  in  variety  is  offered  to  the  public.  In  other  words,  the 
manufacturers  of  today  are  not  standardizing  their  product  as 
they  should. 

Under  such  circumstances  as  these,  the  cost  of  each  article 
or  product  manufactured  is  vital  information,  as  without  it 
the  manufacturer  works  in  the  dark.  He  cannot  intelligently 
standardize  production  because,  not  knowing  which  are  his 
most  profitable  lines,  he  does  not  know  on  which  to  concen- 


PRODUCT  CLASSIFICATION 


41 


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42  COST-FINDING  ELEMENTS  AND  METHODS 

trate.  Therefore,  every  cost  system  should  provide  for  a 
comprehensive  classification  of  the  product,  and  costs  should 
be  ascertained  on  each  class. 

Some  factories  make  only  standard  products,  others  work 
only  on  special  orders,  and  others  again  combine  both  and  also 
buy  manufactured  goods  for  resale.  In  the  latter  case  the 
first  step  in  the  classification  is  to  divide  the  articles  sold  as 
follows : 

1.  Standard  articles  manufactured  for  sale. 

2.  Special  articles  made  to  meet  the  requirements  of  cus- 

tomers. 

3.  Articles  purchased  for  resale. 

The  three  broad  divisions  enumerated  above  may  be  sub- 
divided into  as  many  classifications  as  there  are  lines  of 
manufacture,  or  kinds  of  product  sold. 

One  of  the  best  sources  of  information  for  establishing 
this  classification  is  the  catalogue  or  advertising  literature 
issued  in  connection  with  the  sales  of  the  product.  The  fol- 
lowing classification  is  an  example. 

Varnish  and  paint  industry:  I 

High-grade  varnishes 

Medium-grade  varnishes 

Wood-stains 

Fillers 

Japans 

Dry  colors 

Mixed  paints 

Enamel  paints,  etc. 
In  certain  industries,  it  may  be  advantageous  to  have  a 
very  extensive  product  classification,  the  number  depending, 
of  course,  upon  the  differences  in  the  costs  of  a  varied  line. 
The  above  heading  "mixed  paints,"  for  example,  might  be 
further  subdivided  into  a  dozen  or  more  classes  if  the  cost  of 


PRODUCT  CLASSIFICATION  43 

the  various  kinds  of  mixed  paints  varied  sufficiently  to  make  it 
worth  while  to  calculate  the  cost  of  each  separately. 

The  classification  of  the  product  also  furnishes  a  basis  for 
establishing  storerooms  for  the  different  lines  produced,  such 
storerooms  being  controlled  separately  by  distinctive  cost  ac- 
counts. These  provide  a  means  for  checking  the  accuracy  of 
the  application  of  the  elements  of  cost  to  the  items  of  product 
stored. 


Part  II — Factory  Routine  and  Detailed  Reports 


CHAPTER  V 
FACTORY  ORDERS 

Function  of  the  Factory  Order 

After  the  product  manufactured  has  been  definitely  classi- 
fied, and  distinctive  factory  departments  estabhshed  to  pro- 
vide centers  for  determining  and  reporting  costs,  some  means 
must  be  found  for  applying  the  cost  to  the  product  as  it  passes 
through  the  operating  departments.  For  this  purpose,  all 
items  of  product  must  be  distinctively  designated.  This  is 
usually  done  by  means  of  order  numbers,  which  not  only  facili- 
tate the  compiling  of  the  elements  of  cost  but  also  aid  in  trac- 
ing the  jobs,  orders,  or  articles  through  their  different  stages 
of  manufacture.  Work,  whether  upon  orders  or  repairs,  is 
generally  put  in  operation  by  means  of  a  proper  authorization 
known  as  a  "factory  order."  This  carries  a  number  by  which 
the  job,  order,  or  article  is  thereafter  known  and  distinguished 
from  others. 

Inadequacy  of  Verbal  Orders 

In  small  plants  where  the  work  is  simple  in  character,  in- 
structions may  be  issued  verbally.  This  practice  is  to  be  con- 
demned regardless  of  whether  or  not  a  cost  system  is  used,  as 
many  inefficiencies  may  be  traced  to  orders  of  this  character, 
the  following  being  typical : 

I.  Loss  of  time  due  to  delay  of  proper  instructions  in 
reaching  the  operating  departments. 

45 


46  DETAILED  FACTORY  REPORTS 

2.  Loss  of  time  in  tracing  the  product  in  the  operating 

departments  of  the  plant. 

3.  Errors  in  workmanship  due  to  the  misimderstanding 

of  instructions. 

4.  Irregular  production  due  to  the  absence  of  the  tan- 

gible instructions  which  are  essential  if  factory 
work  is  to  be  given  out  in  the  proper  order. 

5.  Indefinite  and  unreliable  deliveries  to  customers  due 

to  the  absence  of  a  systematic  record  and  method 
of  tracing  the  various  jobs,  orders,  or  articles 
through  the  operating  departments  of  the  plant. 

6.  Absence  of  a  definite  record  to  serve  as  a  basis  for 

an  accurate  system  of  reports,  whether  it  be  a  sys- 
tem of  cost  reports  or  a  system  of  production  or 
statistical  reports. 

Written  Factory  Orders 

The  efficiency  of  a  plant  can  be  judged  only  from  the 
information  furnished  by  a  well-planned  system  of  reports. 
Therefore,  it  is  absolutely  necessary  that  the  authorizations  to 
the  factory  to  do  any  sort  of  work  be  made  in  writing  so  that 
these  instructions  may  be  kept  in  a  permanent  and  accurate 
form  and  serve  as  a  basis  for  reports  and  records. 

Before  deciding  on  the  form  and  general  style  of  factory 
orders,  consideration  should  be  given  as  to  whether  or  not 
they  give  sufficient  information  so  as  to  dispose  of  the 
objections  to  verbal  orders.  These  objections  summarized 
are  loss  of  time,  errors  in  workmanship,  interference  with 
production,  improper  deliveries  to  customers,  and  absence  of 
permanent  records.  If  the  written  factory  orders  dispose  of 
these  objections  and  insure  the  establishment  of  a  permanent, 
accurate,  and  reliable  system  of  reports,  the  benefits  derived 
are  apparent.  In  order  to  provide  for  these  qualities  of  per- 
manency, accuracy,  and  reliability,  which  are  most  essential 


FACTORY  ORDERS  47 

and  which  are  not  obtainable  with  verbal  orders,  the  written 
orders  must  contain  the  following: 

1.  Date,  order  number,  and  description  and  authoriza- 

tion of  the  work  to  be  done,  thus  permitting  ready- 
identification  and  furnishing  a  basis  for  applying 
and  charging  the  elements  of  cost. 

2.  Complete  instructions  as  to  the  method  of  doing  the 

necessary  work. 

3.  Required  date  of  completion,  so  as  to  provide  a  means 

for  ascertaining  the  order  in  which  the  different 
articles  should  be  manufactured. 

4.  Provision  for  recording  information  as  to  the  prog- 

ress and  completion  of  the  order  in  each  depart- 
ment of  the  plant,  so  as  to  provide  a  means  for 
tracing  orders  and  insuring  prompt  deliveries  to 
customers. 

It  is  evident  that  the  above  information  covering  working 
instructions  can  only  be  accurately  transmitted  in  written  form. 
A  logical  objection  to  the  use  of  written  factory  orders  some- 
times advanced  is  that,  if  the  mechanics  in  a  small  factory  or 
a  repair  shop  were  always  to  wait  for  the  issuance  of  written 
orders  before  beginning  a  fresh  job,  unnecessary  delays  would 
occur  and  time  would  be  lost  because  of  the  red  tape  methods. 
In  some  cases  verbal  instructions  may  be  given ;  but  a  written 
order  should  follow  the  verbal  instructions  so  that  workers 
cannot  plead  ignorance  if  mistakes  are  made  and  so  that  time 
and  material  may  be  charged  to  the  order  number  to  which 
they  are  to  be  applied. 

Kinds  of  Factory  Orders 

Factory  orders  are  of  two  kinds:  those  relating  to  pro- 
duction and  those  relating  to  miscellaneous  factory  work. 

A  production  order  authorizes  the  manufacture  of  certain 


4^  DETAILED  FACTORY  REPORTS 

kinds  of  goods,  or  a  single  article  which  may  be  either  for  sale 
or  for  stock. 

Miscellaneous  factory  orders  are  issued  for  the  purpose 
of  authorizing  the  construction  or  repair  of  factory  buildings, 
machinery,  tools,  fixtures,  or  equipment.  These  orders  are 
variously  termed  "Repair,"  "Betterment,"  "Maintenance," 
"Construction,"  "Shop,"  and  "Plant"  orders,  tlie  precise  desig- 
nation depending  upon  the  character  of  the  work  to  be  done 
and  the  method  in  use  in  the  plant. 

Production  Orders — Classification 

Production  orders  may  authorize  the  manufacture  of 
either  the  completed  product  or  parts  thereof,  and  may  be 
classified  as  follows: 

I.  As  to  special  production: 

(a)  Orders  for  specially  manufactured  product. 

(b)  Orders  for  specially  manufactured  parts. 
2.  As  to  standard  production : 

(a)  Orders  for  standard  product. 

(b)  Orders  for  standard  parts. 

(c)  Orders  for  part-finished  product. 

(d)  Orders  for  manufactured  parts. 
3.  As  to  repair  production : 

(a)  Orders  for  repairs  to  the  product  for  cus- 

tomers, or  for  repairs  on  product  in  the 
various  stockrooms. 

(b)  Orders  for  disposition  of  defective  work,  or 

the  correction  of  defects  in  finished  stock, 
part-finished  stock,  or  finished  parts. 

Designation  of  Quantities 

In  the  order  method  of  cost-finding  the  quantities  to  be 
manufactured  and  the  disposition  of  the  product  are  in  most 
instances  specified  in  the  production  orders.     If  the  product 


FACTORY  ORDERS  49 

is  a  standard  article  kept  in  stock,  it  is  advantageous  to  estab- 
lish a  definite  quantity  to  be  produced  at  any  one  time.  Stand- 
ardized units  of  production  tend  to  increase  shop  efficiency  by 
equalizing  the  demands  for  material  and  labor  and  insuring  a 
steady  flow  of  work  through  the  factory.  If  the  quantities  of 
a  standard  product  which  is  manufactured  over  and  over  again 
vary  on  each  factory  order,  work  tends  to  become  spasmodic 
and  its  flow  uneven  with,  in  consequence,  either  congestion  or 
slackness  in  the  operating  departments. 

Under  the  process  method  it  is  not  always  practicable 
to  specify  definite  quantities  upon  the  production  orders,  for 
the  reason  that  where  this  method  is  used  the  processes  are 
usually  continuous,  lasting  one  or  more  days  or  even  weeks. 
Orders  are  issued  daily,  weekly,  or  monthly,  as  required  for 
the  production  of  the  articles  designated  thereon,  and  the 
quantity  produced  is  usually  determined  after  their  manufac- 
ture and  inspection  is  completed. 

Sub-Production  Orders 

Where  the  product  is  composed  of  several  parts  manufac- 
tured separately,  two  kinds  of  production  orders  are  issued : 

1.  The  main  or  principal  production  order 

2,  Sub-production  orders 

The  main  production  order  designates  the  quantity  and 
kind  of  completed  articles,  while  the  sub-production  orders 
cover  the  manufacture  of  the  various  parts.  The  sub-produc- 
tion orders  may  be  prepared  and  issued  at  the  same  time  as 
the  main  production  order,-  or  they  may  be  written  up  by  the 
factory  foremen  or  their  clerks  when  it  is  necessary  to  manu- 
facture the  parts. 

The  Grouping  of  Small  Orders 

In  factories  where  the  units  of  production  are  small  and 
numerous,  the  preparation  of  a  separate  order  in  each  case 


50  DETAILED  FACTORY  REPORTS 

may  involve  so  much  clerical  work  as  not  to  be  worth  the 
expenditure  in  time  and  trouble.  If  the  system  of  cost-finding 
proves  this  to  be  a  fact,  the  work  can  be  simplified  by  grouping 
a  number  of  small  orders  daily,  weekly,  or  monthly  and  accord- 
ing to  the  classification  of  product.  In  this  way  one  compre- 
hensive order  can  be  issued  to  cover  the  production  of  a  score 
or  more  of  small  special  orders.  The  advantages  of  thus 
grouping  orders  when  the  product  is  sufficiently  homogeneous 
to  permit  it,  are  apparent.  The  number  of  records  required 
is  greatly  reduced,  with  a  corresponding  reduction  in  the 
clerical  work  involved. 

Special  Production  Orders 

In  some  industries  the  entire  line  of  merchandise  is  spe- 
cially manufactured  to  customers'  requirements.  In  such 
cases  all  the  production  orders  issued  to  the  manufacturing  de- 
partments are  for  special  production.  These  authorize  the 
manufacture  of  the  special  product  and  the  special  parts,  all  of 
which  are  ready  for  shipment  as  soon  as  the  work  has  been 
completed. 

In  other  industries  the  product  manufactured  is  more  or 
less  standardized  and  the  special  product  forms  only  a  portion 
of  the  total  factory  production.  In  cases  of  this  kind  it  is 
essential  so  to  designate  the  special  production  that  it  may  be 
classified  separately  and  not  be  confused  with  the  regular 
staple  line  of  merchandise. 

The  Production  of  Parts  and  Finished  Stock 

Production  orders  are  issued  for  a  standard  product  or 
for  the  manufacture  of  material  or  parts  which  will  later  form 
part  thereof.  This  standard  product  includes  those  articles 
which  form  the  staple  line  of  the  particular  industry  and  which 
may  be  carried  in  stock  for  future  sale.  When  the  finished 
stock  of  certain  standard  articles  is  depleted,  production  orders 


FACTORY  ORDERS 


51 


may  be  issued  for  standard  product  which  is  to  be  shipped  to 
customers  as  soon  as  the  manufacture  of  the  articles  is  com- 
pleted. Under  such  circumstances,  the  standard  product  does 
not  go  to  the  stock-rooms  at  all. 

Standard  production  orders  may  authorize  the  manufac- 
ture of  finished  stock,  finished  parts,  part-finished  stock,  or 
manufactured  parts.  The  term  "finished  stock"  designates 
the  completed  product  stored  ready  to  be  shipped.  Finished 
parts  comprise  those  portions  of  the  product  which  are  stored 
to  await  their  assembly  into  the  completed  article.  Part-fin- 
ished stock  comprises  all  stock  in  an  uncompleted  stage  of 
manufacture.  Though  "manufactured  parts"  has  practically 
the  same  meaning  as  ''finished  parts,"  in  some  industries  the 
parts  to  be  used  in  the  manufacture  of  the  completed  article  are 
stored  in  the  raw  material  storeroom  where  they  are  treated 
as  raw  material  and  requisitioned  out  when  needed.  To  dis- 
tinguish them  from  any  finished  parts  kept  in  a  parts  stock- 
room, they  are  designated  ''manufactured  parts." 

To  illustrate  these  various  classes  of  production,  the 
classifications  used  in  the  manufacture  of  desks  may  be  cited. 
The  completed  desk  is  classed  as  finished  stock;  the  sides,  top, 
and  drawers  of  the  desk  may  all  be  completed  separately  and 
stored  as  finished  parts ;  the  assembled  desk  in  the  white,  that 
is,  before  the  varnish  and  finish  has  been  applied,  may  be 
known  as  "part-finished  stock."  The  locks  and  handles  may 
be  manufactured  and  transferred  to  the  raw  material  store- 
room and  be  designated  as  "manufactured  parts." 

"Finished  stock"  is  also  known  as  "manufactured  stock" 
and  "completed  stock."  "Finished  parts"  are  also  often 
termed  "completed  parts"  and  "manufactured  parts."  "Part- 
finished  stock"  is  frequently  designated  "semi-finished  stock," 
"partly  finished  stock,"  "partly  completed  stock,"  and  "partly 
manufactured  stock."  The  precise  term  used  is  immaterial  if 
the  meaning  in  all  cases  is  clear. 


52  DETAILED  FACTORY  REPORTS 

Repairs  to  Product  Orders 

Production  orders  are  sometimes  issued  to  cover  repairs 
to  product,  especially  where  the  necessity  for  repairs  occurs 

/  frequently.  Such  an  order  may  relate  to  defective  articles 
which  are  to  be  repaired  and  made  salable.  In  all  cases,  pro- 
duction orders  issued  for  the  disposition  of  defective  work, 
or  for  the  correction  of  defects  in  articles  manufactured, 
should  be  numbered  and  distinctively  designated  so  that  the 
-V^  costs  may  be  properly  applied.  If  the  defective  product  can- 
not be  repaired,  the  only  practicable  method  of  disposal  may 
be  to  scrap  it  and  sell  it  as  such,  or  to  reconvert  it  into  raw 

V  material. 

Miscellaneous  Factory  Orders — Classification 

Miscellaneous  factory  orders  include  the  following: 

1.  Construction  orders,  issued  for  the  erection  of  new 

buildings,  or  the  manufacture  of  machinery,  tools, 
and  equipment. 

2.  Betterment  orders,  issued  to  improve  the  buildings, 

machinery,  tools,  and  equipment,  or  for  experi- 
mental work  which  would  tend  to  improve  the 
processes  of  manufacture. 

3.  Repair  and  standing  orders,  issued  to  authorize  the 

necessary  repairs  to  the  buildings,  machinery, 
tools,  or  equipment. 

These  orders,  like  any  other  factory  orders,  are  issued  to 
collect  the  cost  of  the  work  they  designate.  The  disposition 
or  treatment  of  the  cost  is  separately  considered  in  following 
sections. 

Construction  Orders 

As  the  cost  of  work  done  under  construction  orders  adds 
to  the  capital  investment  in  plant,  it  is  capitalized  among  the 


FACTORY  ORDERS  53 

fixed  assets.  While  it  is  apparent  that  no  items  of  cost  should 
be  charged  against  a  construction  order  which  would  unduly 
inflate  the  value  of  the  asset  produced,  it  is  necessary  to  point 
out  that  this  is  frequently  done  through  inexperience.  Ma- 
chinery constructed  in  a  plant  ill-adapted  for  the  purpose  has 
sometimes  been  capitalized  at  a  much  higher  figure  than  that 
at  which  it  could  be  purchased  in  the  open  market. 

Betterment  Orders 

If  betterment  orders  are  issued  for  improvements  which 
are  permanent  in  their  nature,  such  as  the  erection  of  parti- 
tions or  the  construction  of  a  roadway,  the  costs  should  be 
capitalized  among  the  fixed  assets.  If  the  betterment  is  an  ex- 
pense of  a  recurring  nature,  it  should  be  charged  to  overhead, 
in  which  case,  if  large  in  amount,  it  may  be  treated  as  a  de- 
ferred charge  and  its  cost  spread  over  several  periods.  The 
expense  of  painting  the  building  is  a  case  in  point.  Such  a 
betterment  obviously  cannot  be  regarded  as  of  any  asset  value, 
and  yet  it  is  not  an  expense  wholly  chargeable  to  the  period  in 
which  the  work  is  done. 

Repair  Orders 

The  cost  of  any  repair  work  on  buildings,  machinery, 
tools,  fixtures,  and  equipment  should  be  compiled  and  charged 
to  the  department  for  which  the  expense  is  incurred,  or  to  a 
general  "Maintenance  and  Repairs"  account  if  the  expense  is 
to  be  distributed  over  more  than  one  department. 

Certain  kinds  of  repair  work  which  recur  with  regular 
frequency,  such  as  the  repairing  of  belts,  the  sharpening  of 
tools,  the  changing  of  dies,  etc.,  may  be  covered  by  monthly 
repair  orders.  This  makes  unnecessary  the  issuing  of  a  new 
repair  order  every  time  such  work  needs  to  be  done,  as  all 
work  of  this  character  can  then  be  charged  to  a  "standing 
order"  number  to  be  described  in  the  following  section. 


54  DETAILED  FACTORY  REPORTS 

Standing  Orders 

Where  the  same  kind  of  product  is  manufactured  in  simi- 
lar quantity  with  more  or  less  regular  frequency,  or  where 
certain  kinds  of  repair  work  form  part  of  the  ordinary  routine 
of  factory  maintenance,  a  "Standing  Order"  may  be  issued  to 
authorize  the  performance  of  that  particular  kind  of  work  as 
required.  Such  an  order  may  cover  a  definite  period  or 
"stand"  until  further  notice.  Workers  then  charge  their  time 
and  any  material  used  on  a  particular  standing  order  against 
its  number.  This  procedure  does  away  with  the  necessity  of 
issuing  new  orders  to  cover  similar  jobs  again  and  again, 
while  it  standardizes  and  greatly  simplifies  the  giving  of  in- 
structions to  employees. 

To  enable  workers  to  charge  their  time  and  material  cor- 
rectly, the  standing  orders  and  their  numbers  are  usually 
brought  to  the  attention  of  factory  employees  by  posting  them 
on  the  department  bulletin  boards  or  by  printing  them  on  the 
back  of  time  sheets — ^properly  classified  as  to  kinds  of  work 
for  ready  reference. 

When  a  considerable  number  of  standing  orders  are 
issued,  an  order  register  is  a  convenience,  showing  the  fixed 
standing  order  numbers  and  the  description  of  the  work  to  be 
done  under  each  of  these  orders. 

Order  Numbers 

All  factory  orders  should  be  numbered  and  classified  by 
means  of  a  definite  series  of  numbers  allotted  to  each  class — 
as  I  to  5,000  for  standard  production  orders,  6,000  to  8,000 
for  special  production  orders,  9,000  to  10,000  for  other  fac- 
tory orders,  and  so  on.  The  classification  may  also  be  desig- 
nated by  prefixing  or  affixing  letters  of  the  alphabet  to  the 
numbers.  Employees  then  know  at  once  the  class  of  work 
involved  when  the  key  letter  or  number  of  the  order  is  re^ 
f erred  to. 


FACTORY  ORDERS  55 

Summary  of  Factory  Orders 

Form  5  summarizes  the  various  kinds  of  factory  orders 
which  may  be  issued  and  the  functions  of  these  records. 

Designing  Factory  Orders 

The  precise  ruHng  of,  and  information  furnished  by,  the 
factory  order  depends  wholly  upon  the  functions  it  is  to  per- 
form. In  actual  practice  it  ranges  from  a  simple  notice  to 
begin  operations  upon  a  certain  class  of  work,  to  an  elaborate 
record  upon  which  may  be  compiled  the  various  elements  of 
cost  affecting  the  particular  order. 

The  design  of  the  form  may  be  determined  by  answers  to 
the  following  questions.  These  will  indicate  the  amount  of 
information  the  record  is  to  contain  and  thus  the  rulings  and 
spaces  to  be  provided. 

1.  By  whom  is  the  order  to  be  issued  and  authorized? 

2.  How  many  copies  are  to  be  issued? 

3.  What  is  to  be  the  disposition  of  each  copy? 

4.  What  are  the  requirements  as  to  recording  progress 

of  work,  defects,  shipments,  etc.  ? 

5.  What  is  to  be  the  final  disposition  of  all  copies? 

The  answers  to  the  above  questions  are  covered  in  following 
sections. 

Issuance  and  Authorization 

In  a  large  plant  a  special  order  department  may  be  organ- 
ized for  the  issuance  of  factory  orders  if  the  work  is  sufficient 
in  its  volume  and  detail  to  occupy  the  time  of  several  em- 
ployees. In  some  cases,  however,  the  order  work  is  taken  care 
of  in  the  factory  superintendent's  office.  In  small  factories, 
the  cost  department,  the  shipping  department,  or  the  sales  de- 
partment may  handle  the  work. 

When  special  goods  are  manufactured  for  customers  their 


56 


DETAILED  FACTORY  REPORTS 


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FACTORY  ORDERS  57 

orders  govern  the  issuance  of  factory  instructions  entirely. 
When  standard  products  are  turned  out  to  a  large  extent,  the 
maximum  and  minimum  quantities  on  hand,  as  shown  on  the 
stock  records,  govern  the  kind  and  quantity  of  production. 
The  miscellaneous  orders  issued  to  cover  construction,  repair, 
and  betterment  work,  will  obviously  depend  upon  the  require- 
ments in  each  case. 

Number  of  Copies 

The  number  of  copies  of  the  factory  order  may  range 
from  one  to  eight  or  a  dozen,  depending  upon  the  number 
of  operating  departments  through  which  the  order  passes,  and 
the  final  disposition  of  the  product  when  it  is  completely  manu- 
factured. 

As  many  copies  of  the  factory  order  should  be  made  out 
as  there  are  persons  requiring  the  instructions  or  information 
it  contains.  Where  work  is  of  a  simple  character  two  copies 
may  suffice.  One  follows  the  job  through  the  various  processes 
of  manufacture,  and  the  other  is  kept  in  the  office.  If,  how- 
ever, the  work  passes  through  several  departments  and  a  num- 
ber of  foremen  require  special  instructions,  it  would  obviously 
be  advantageous  to  issue  a  separate  copy  for  each  department. 
If  the  instructions  go  into  great  detail  they  should  be  entered 
on  a  standard  practice  sheet  and  a  copy  of  the  instructions 
should  be  attached  to  any  order  to  which  they  apply.  Blue- 
prints, sketches,  or  drawings,  should  also  be  attached  when 
required. 

Simple  Form  of  Factory  Order 

The  simplest  kind  of  a  factory  order  which  may  be  issued 
contains  information  as  to : 

1.  Order  number  and  date. 

2.  Department  of  the  plant  for  which  the  special  copy 


58 


DETAILED  FACTORY  REPORTS 


of  the  order  is  intended,  and  date  the  order  is  to 
be  completed. 

3.  Quantity  of  product  and  description  of  the  work  to 

be  done. 

4.  Signature  of  the  person  responsible  for  the  issuance 

of  the  order. 
The  simple  production  order  shown  in  Form  6  gives  all 
the  above  information. 


FACTORY   ORDER 

No 

Date 

To Department 

Manufacture  the  following  articles  and  have  same  completed 

Quantity 

Description 

Approved  by 

Signature. 

Form  6.    Simple  Factory  Order.     (Size,  8  x  5.) 


Development  of  Factory  Order 

Further  stages  in  the  development  of  the  order  are  when, 
in  addition  to  describing  the  work,  it  also  designates: 


FACTORY  ORDERS  59 

1.  The  material  to  be  used. 

2.  The  patterns,  tools,  or  dies  required. 

3.  The  time  the  work  begins  and  ends. 

4.  The  production,  classified  as  to  good  and  defective. 

5.  The  date  of  shipment. 

6.  The  cost  of  the  order. 

Thus  such  a  record  may  be  developed  to  serve  any  or  all 
of  the  following  purposes : 

1.  Factory  order  and  instructions  to  foremen 

2.  Factory  order  and  material  requisition 

3.  Factory  order  and  labor  report 

4.  Factory  order  and  production  report 

5.  Factory  order  and  shipping  record 

6.  Factory  order  and  cost  sheet 

When  the  factory  order  is  combined  with  the  material 
requisition,  a  copy  should  go  to  the  stock  clerk,  so  that  he  may 
be  notified  of  the  material  requirements  of  the  particular  job- 
This  enables  him  to  check  the  quantity  issued,  which  cannot  be 
exceeded  except  upon  the  request  of  a  responsible  official.  A 
supplementary  material  requisition  should  then  state  the  rea- 
son for  the  additional  withdrawal.  Factory  orders  of  this 
kind  guard  against  dishonesty  and  serve  as  a  check  for  re- 
porting spoiled  or  defective  work,  which  otherwise  might  pass 
unnoticed.  Whether  or  not  the  factory  order  is  used  as  a  ma- 
terial requisition,  or  a  separate  requisition  is  made  out  from  the 
information  given  on  the  order,  is  a  matter  of  convenience  in 
a  given  case. 

When  the  factory  order  and  labor  report  are  combined, 
this  form  should  provide  for  gathering  information  as  to  the 
quantity  produced,  the  time  spent  in  producing  it,  and  the  men 
employed,  after  which  it  is  returned  to  the  cost  office  so  that 
the  labor  cost  of  the  order  may  be  compiled. 

When  the  quantity  produced  is  reported  upon  the  factory 


6o  DETAILED  FACTORY  REPORTS 

order,  it  becomes  a  production  report.  When  it  is  desirable 
for  the  factory  order  to  serve  this  purpose,  it  may  be  printed 
and  prepared  in  the  form  of  perforated  coupons — one  for  each 
department  from  which  a  report  of  production  is  required. 
The  receipt  of  these  coupons  in  the  office  then  indicates  the 
progress  of  work  and  the  completion  of  the  job  in  the  depart- 
ment which  has  sent  in  its  coupon. 

When  the  duplicate  copy  of  the  factory  order  takes  the 
form  of  a  shipping  order,  it  should  contain  all  necessary  ship- 
ping instructions  and  space  for  recording  shipments,  either  in 
part  or  in  whole.  When  the  duplicate  copy  serves  as  a  cost 
sheet,  it  should  provide  columns  for  collecting  the  material, 
labor,  and  overhead  cost  of  the  job. 

Filing  and  Final  Disposition  of  the  Factory  Order 

The  filing  and  final  disposition  of  the  various  copies  of 
the  factory  orders  depend  to  a  large  extent  upon  the  use  in 
each  case.  Upon  each  copy  should  be  printed  the  exact  pur- 
pose for  which  it  is  to  be  used,  and  also  to  whom  it  is  to  be 
sent.  One  copy  should  remain,  of  course,  in  the  department 
in  which  the  order  originated.  If  it  is  not  possible  to  issue  the 
orders  from  a  department,  an  order  register  should  be  kept 
showing  the  numbers  of  those  issued,  with  a  description  of  the 
work  to  which  they  relate;  or  a  copy  of  all  orders  issued  may 
be  filed  to  give  the  required  information. 

If  a  copy  of  the  order  is  used  as  a  material  requisition, 
this  copy  should  be  returned  to  the  cost  office  after  the  infor- 
mation as  to  the  quantity  and  description  of  material  issued  has 
been  entered  and  approved  by  the  stock-keeper.  In  the  cost 
office,  it  would  be  filed  in  a  separate  material  requisition  file, 
according  to  order  number  or  requisition  number,  if  one  were 
used,  after  the  information  as  to  material  cost  has  been  prop- 
erly posted  on  the  cost  records. 

When  a  copy  of  the  factory  order  is  used  as  a  labor  re- 


FACTORY  ORDERS        ^  6l 

port,  this  copy  is  returned  to  the  pay-roll  department  and  cost 
office,  after  the  information  as  to  the  labor  cost  has  been 
properly  entered  thereon.  When  the  pay-roll  department  and 
cost  office  have  finished  transferring  the  information  to  the 
pay-roll  records  and  cost  sheets,  the  labor  reports  may  be  filed 
according  to  department  and  order  number,  or  according  to 
department  and  operator's  number. 

Copies  of  the  factory  orders  used  as  production  reports 
should  be  returned  to  the  cost  office  after  the  information  as 
to  production  has  been  properly  recorded  in  the  factory.  These 
production  reports  should  be  filed  according  either  to  operating 
department  and  date,  or  to  factory  order  number  after  the  in- 
formation has  been  transferred  to  the  summarizing  records. 

The  shipping  record  copy  of  the  factory  order — when  this 
is  used — often  remains  in  the  shipping  department  where, 
after  the  entire  order  is  shipped,  it  is  filed  in  a  separate  loose- 
leaf  "Completed  Orders  Binder"  according  to  factory  order 
or  shipping  order  number.  If  the  shipping  record  copy  of  the 
factory  order  is  returned  to  the  office  after  the  order  is  entirely 
shipped — for  the  purpose  of  preparing  the  customer's  invoice 
— such  copies  may  be  filed  according  to  factory  order  number 
in  a  loose-leaf  binder  in  the  office. 

When  a  copy  of  the  factory  order  is  employed  as  a 
cost  sheet,  such  copies  are  filed  in  loose-leaf  binders,  according 
to  order  numbers  so  as  to  facilitate  the  daily  postings  of  the 
material,  labor,  and  overhead  items  to  cost  sheets.  After  the 
orders  are  entirely  completed  and  the  total  costs  are  ascer- 
tained, the  cost  sheets  are  filed  according  to  the  factory  order 
number,  customer's  name,  or  articles  manufactured — as  the 
case  requires. 

Sales  Orders 

When  the  product  is  specially  manufactured,  the  cus- 
tomers' instructions  form  the  basis  for  the  issuance  of  the  pro- 


62 


DETAILED  FACTORY  REPORTS 


duction  orders  the  data  for  which  are  usually  obtained  from 
the  sales  orders. 

Orders  from  customers  may  come  in  from  several  sources 
and  in  many  forms,  but  most  organizations  provide  a  stand- 


SALES  ORDER 
Date... 


No. 


Customer's  Name 

Address 

Terms » 

Shipping  Instructions.. 


Article 


Grade         Quantity     Price      Amount 


Approved  by                                      Taken  by 

■• > 

Fwm  7.    Sales  Order.     (Size,  6  x  11.) 


ardized  sales  order  blank  similar  to  that  of  Form  7.  On  this  is 
recorded  the  customer's  name  and  address,  together  with  ship- 
ping directions  and  terms  for  the  payment  of  the  merchandise, 


FACTORY  ORDERS  63 

also  sales  order  number  and  date.  Columns  below  provide 
for  recording  the  article  or  style  number,  the  quantity  ordered, 
the  grade  or  size,  and  other  descriptive  information. 

Before  the  sales  orders  are  passed  to  the  order  department 
for  registry  or  to  the  shipping  department  for  shipment  of 
the  merchandise,  they  should  be  approved  by  the  credit  de- 
partment ;  and  no  sales  order  should  be  accepted  without  such 
approval,  as  the  terms  proposed  and  the  customer's  financial 
status  may  not  be  satisfactory. 

If  the  product  is  to  be  specially  manufactured,  a  sepa- 
rate factory  order  is  issued  for  each  sales  order  received. 
When  the  product  is  standard,  it  may  be  possible  to  group 
several  jobs  and  issue  one  factory  order  to  cover  the  require- 
ments of  a  number  of  sales  orders.  On  the  other  hand,  sales 
orders  are  often  filled  from  stock  on  hand,  the  factory  orders 
being  issued  for  fixed  quantities  of  production  for  stock  at 
various  times  during  the  season  of  manufacture. 

When  the  process  method  of  cost-finding  is  used,  the 
sales  orders  received  from  the  customers  have  only  an  indirect 
relation  to  the  factory  orders.  The  processes  of  manufacturing 
are  continuous  and  practically  all  sales  orders  are  filled  from 
the  stock  of  finished  articles  on  hand. 

Registering  Sales  Orders 

Sales  orders  should  be  registered  as  received  so  that  in- 
formation as  to  the  quantity  of  production  ahead  of  the  fac- 
tory may  be  readily  available  at  all  times.  To  this  end  it  is 
advisable  to  make  duplicate  copies  of  the  sales  order,  one  to 
serve  as  a  register  of  the  order  and  another  for  use  in  pre- 
paring the  factory  orders.  A  copy  of  the  sales  order  is  also 
a  convenient  record  of  the  number  of  "back  orders"  on  hand 
when  part  shipments  are  made  on  orders  of  unwieldy  size  or 
to  hasten  delivery  to  impatient  customers.  In  addition,  orders 
received  should  be  registered  by  kinds  of  articles  or  product 
in  demand  to  show  all  of  the  unfilled  sales  orders  for  that 


64  DETAILED  FACTORY  REPORTS 

particular  article.  When  numerous  orders  are  received  for 
delivery  at  future  dates,  it  is  advisable  to  keep  a  register  of 
sales  orders,  in  which  appears  each  customer's  account.  To 
sum  up  the  method  of  insuring  that  orders  are  delivered  on 
the  date  promised  it  is  necessary: 

1.  To  keep  sales  orders  numerically  arranged  so  that 

quick  reference  may  be  made  to  items  ordered 
and  items  which  have  been  shipped. 

2.  To    register   sales    orders    according   to    customers' 

names  to  show  the  unfilled  order  numbers  and  the 
quantities  due  on  each  order. 

3.  To  register  sales  orders  according  to  articles  to  show 

the  quantity  of  each  kind  ordered. 

Customers  often  inquire  as  to  the  state  of  their  unfilled 
orders,  and  this  information  is  gathered  from  the  record  which 
shows  the  quantities  due  each  customer  on  each  sales  order. 

After  an  order  is  completely  filled  and  all  the  customer's 
requirements  have  been  satisfied,  the  various  copies  of  the 
sales  order  are  transferred  to  files  which  may  be  arranged 
according  to  order  number,  customer's  name,  or  article  manu- 
factured. Full  indexes  should  always  be  maintained,  thereby 
enabling  quick  reference  to  be  made  to  any  sales  order,  whether 
specified  by  order  number,  customer's  name,  or  article. 


CHAPTER  VI 

MATERIAL  AND  MATERIAL  REPORTS 

Procedure  in  Handling  Material 

The  first  element  of  cost  to  be  considered  in  cost  calcu- 
lations, or  when  ascertaining  the  selling  price  of  product,  is 
the  material  cost.  The  securing  and  handling  of  material  as 
it  comes  in  and  passes  through  the  processes  of  manufacture 
in  the  different  departments  of  the  plant  involves : 

1.  Purchasing 

2.  Receiving 

3.  Storing 

4.  Requisitioning 

5.  Disposition 

6.  Ascertaining  cost 

7.  Inventorying 

Purchasing  the  Material 

The  routine  of  purchasing  material  is  mainly  concerned 
with  the  methods  by  which  the  different  departments  of  the 
plant  make  their  material  needs  known,  and  the  methods  of 
ordering  the  material  from  outsiders.  In  large  organizations 
the  purchase  of  material  is  always  made  by  or  under  the  direct 
supervision  of  a  well-planned  purchasing  department.  The 
forms  generally  used  in  the  purchasing  department  are  the 
following : 

1.  Purchase  requisition 

2.  Purchase  order 

3.  Register  of  purchase  orders 

4.  Price  records 

65 


66 


DETAILED  FACTORY  REPORTS 


Purchase   Requisition 

The  purchase  requisition  (Form  8)  is  a  request  for  pur- 
chases, upon  which  are  entered  the  requirements  for  material 
and  suppHes  for  the  various  departments  of  the  organization. 
A  purchase  requisition  may  be  prepared  by: 

1.  Raw  material  stores  clerk 

2.  Factory  superintendent 

3.  Foremen  of  operating  departments 

4.  Heads  of  office  departments 


PXn^CHASE   REQUISITION 

Department 

No 

Date 

To 

(Purchasing  Agent) 

Please  place  an  order  for  the  following  articles: 

Quantity 

Description 

Date  Wanted 

Purchase  Order  ^ 

Signed 

Jo      

Date  of  Purchase 

Order        ^^^'^^^ 

Form  8.   Purchase  Requisition.     (Size,  8  x  5.) 


MATERIAL  AND  MATERIAL  REPORTS  67 

Every  purchase  requisition  should  bear  a  number,  should 
be  properly  dated,  and  should  show  the  department  in  which 
it  originated.  It  should  contain  a  complete  description  of  the 
material  desired,  and  the  quantity,  and  may  provide  a  space  for 
recording  the  purchase  order  number  at  the  time  an  order  is 
placed  for  the  material.  When  the  material  is  needed  in  a 
hurry,  a  "rush"  purchase  requisition  may  be  prepared  of  a 
different  color  from  the  regular  purchase  requisition.  If  this 
is  not  thought  advisable,  the  requisition  should  be  indicated 
in  some  other  way  as  a  "rush"  requirement,  so  that  the  order 
for  the  material  will  be  placed  promptly.  Purchase  requisitions 
should  be  signed  by  the  person  requiring  the  material  and  be 
approved  by  some  person  in  authority,  if  the  person  preparing 
them  is  working  in  a  subordinate  capacity. 

As  a  rule,  the  purchase  requisition  is  prepared  in  dupli- 
cate. The  original  is  sent  to  the  purchasing  department  where 
it  is  filed  after  the  purchase  order  has  been  properly  pre- 
pared; the  duplicate  copy  remains  in  the  department  in  which 
the  requisition  originated. 

The  stores  clerk  usually  prepares  purchase  requisitions  for 
replenishing  the  stock,  in  accordance  with  the  maximum  and 
minimum  quantities  of  raw  stock  and  supplies  to  be  carried, 
as  indicated  upon  the  raw  stock  records.  The  minimum  quan- 
tities show  the  limit  below  which  it  is  not  safe  to  allow  stock 
to  go,  on  account  of  the  risk  of  exhaustion  before  a  new 
supply  can  be  secured,  with  a  possible  serious  delay  in  filling 
customers'  orders.  The  maximum  quantities  are  the  stand- 
ard amounts  above  which  it  is  undesirable  to  go  for  the 
reason  that  too  much  capital  may  be  invested  in  a  particular 
item,  or  the  *'over-stock"  may  deteriorate  before  it  can  be  used. 
When  these  maximum  and  minimum  quantities  of  stock  to  be 
carried  are  once  definitely  established,  they  are,  as  a  rule, 
entered  upon  the  storeroom  records  so  that  the  stores  clerk 
may  have  this  information  always  at  hand. 


68  DETAILED  FACTORY  REPORTS 

When  the  process  method  of  cost-finding  is  in  use,  and 
the  product  is  a  standard  article  or  line,  the  stores  clerk 
prepares  practically  all  of  the  purchase  requisitions.  When 
the  order  method  of  cost-finding  is  in  use  and  the  articles 
manufactured  are  special  in  character,  the  requisitions  may  be 
made  out  by  either  the  factory  superintendent,  the  production 
manager,  or  the  foremen  of  the  operating  departments  in  which 
the  materials  are  needed,  as  these  foremen  know  better  than 
almost  anyone  else  the  material  requirements  of  the  special 
work  on  hand.  In  some  organizations  the  material  require- 
ments for  special  articles  are  determined  by  a  well-organized 
material  department.  In  other  organizations  purchase  requisi- 
tions of  this  nature  are  prepared  by  office  clerks  who,  from  a 
study  of  the  requirements  as  shown  by  the  blue-print,  sketch, 
drawing,  model,  or  estimate,  determine  the  materials  needed. 

Purchase  Order 

The  purchase  order  (Form  9)  is  an  order  form  upon 
which  are  entered  definite  instructions  to  the  seller  as  to 
material  and  supplies  desired.  Usually  the  purchase  order  is 
made  out  in  duplicate,  the  original  copy  going  to  the  selling 
firm  and  the  duplicate  remaining  in  the  purchasing  department 
where,  until  the  order  is  filled,  it  is  kept  in  an  unfilled  orders 
file.  All  purchase  orders  should  be  given  a  serial  number  and 
this  number  should  be  entered  upon  the  invoice  by  the  selling 
concern.  This  simplifies  reference  to  the  purchase  order  should 
any  question  or  dispute  arise  before  the  material  is  finally 
accepted  and  used. 

The  purchase  order  form  should  provide  for  the  date, 
and  the  name  of  the  concern  from  whom  the  material  is  or- 
dered. Provision  should  also  be  made  for  a  complete  statement 
as  to  the  quantity  and  kind  of  material  desired.  Instructions 
as  to  the  shipment  of  the  articles  ordered  are  often  incorpo- 
rated in  this  form.     In  most  cases  the  prices  of  articles  or- 


MATERIAL  AND  MATERIAL  REPORTS 


69 


dered  are  also  shown,  together  with  the  terms  of  payment. 
The  form  should  be  signed  by  the  head  of  the  purchasing  de- 
partment. 


PURCHASE   ORDER 

A.  B.  C.  COMPANY 

Philadelphia,  Pa. 


No., 


Date 

To 

Address 

You  are  hereby  authorized  to  furnish  the  following  material  on 
to  be  shipped  to 


via 

Quantity 

Description 

Price 

Terms 

Kindly  acknowledge  receipt  of  this  order,  and  place  above  order 
number  on  all  packages  and  invoices. 


(Signature) 


Form  9.    Purchase  Order.     (Size,  8  x  5.) 


When  contracts  are  placed  for  the  purchase  of  material 
and  part  shipments  are  received  over  long  periods  of  time, 
provision  should  be  made  for  recording,  upon  the  back  of  the 


70  DETAILED  FACTORY  REPORTS 

purchase  order,  part  deliveries  of  the  material.  Purchase 
orders  should  also  provide  for  recording  the  date  of  approval 
of  the  invoice,  which  denotes  that  the  purchase  order  has  been 
properly  filled  and  completed.  After  this — the  material  having 
been  received  and  the  invoice  passed  for  entr}-^  and  payment — 
the  copy  of  the  purchase  order  in  the  office  is  transferred  to  a 
"filled  orders"  file. 

It  is  often  desirable  to  combine  the  purchase  requisition 
and  purchase  order,  thereby  eliminating  the  necessity  of  having 
two  forms.  This  is  especially  true  in  small  concerns,  and  in 
such  case,  three  copies  of  the  form  would  be  prepared.  The 
original  copy  goes  to  the  selling  company  and  serves  as  a 
purchase  order;  the  duplicate  copy  remains  in  the  purchasing 
department  as  the  reference  copy  of  the  purchase  order;  and 
the  triplicate  copy  remains  in  the  department  in  which  the 
order  originated,  in  this  case  serving  as  a  purchase  requisi- 
tion. 

Register  of  Purchase  Orders 

Every  purchase  order  should,  of  course,  be  given  a  serial 
number  so  that  it  can  be  filed  numerically  after  it  is  filled,  for 
future  reference.  On  the  other  hand,  it  is  often  necessary  to 
file  unfilled  purchase  orders  alphabetically  under  names  of  the 
concerns  to  whom  the  purchase  orders  were  sent.  From  this 
file  information  can  be  obtained  at  any  time  as  to  the  exact 
date  and  number  of  every  purchase  order  which  has  been  sent 
to  any  particular  concern. 

If  these  orders  are  arranged  and  filed  alphabetically,  ac- 
cording to  the  names  of  the  concerns  to  whom  they  were  sent, 
it  may  be  desirable  to  prepare  also  a  register  of  purchase  orders 
(Form  lo),  showing  the  date,  the  number,  and  the  name  of 
the  selling  concern  in  a  columnar-ruled  record  so  as  to  facili- 
tate reference  to  individual  orders  when  checking  the  invoices, 
and  receipt  of  material,  etc. 


MATERIAL  AND  MATERIAL  REPORTS 


71 


REGISTER   OF   PURCHASE   ORDERS 

For  the  month  of .to 

Day 

Purchase 

Order 

No. 

Name  of  Concern 

Form  10.    Register  of  Purchase  Orders.     (Size,  8  x  11.) 

Filing  of  Catalogues,  etc. 

The  purchasing  departments  of  large  concerns  receive  nu- 
merous catalogues,  price  lists,  and  price  quotations  in  con- 
nection with  the  material  and  supplies  which  are  ordinarily- 
purchased  by  them.  The  filing  and  method  of  using  these  quo- 
tations, price  lists,  and  catalogues  is  an  office  organization 
matter,  and  as  a  rule  has  little  direct  connection  with  the  cost 
organization.  All  catalogues  should  be  numbered  and  should 
be  indexed  by  names  and  by  articles,  so  as  to  facilitate  refer- 
ence to  them. 

The  price  quotations  on  materials  and  supplies,  which 
fluctuate  considerably,  should  also  be  registered  upon  a  per- 
manent record  so  as  to  facilitate  reference  to  the  prices  which 
were  quoted  at  different  times.  This  price  record  is  of  value, 
as  well,  for  checking  the  prices  upon  the  purchase  orders  and 
invoices  and  in  discovering  discrepancies. 


^2  DETAILED  FACTORY  REPORTS 

Price  records  may  be  kept  upon  a  standard  3x5  index 
card,  these  cards  being  headed  with  the  name  of  the  concern 
which  has  made  the  quotation  and  price.  The  date  of  the 
price,  and  the  description  or  kind  of  material,  should  also  be 
specified  upon  these  cards.  The  cards  are  usually  arranged 
alphabetically  under  the  name  of  the  concern,  but  in  some  in- 
stances it  may  be  advisable  to  arrange  them  alphabetically,  ac- 
cording to  the  article  or  the  class  of  merchandise  which  is 
quoted. 

Receiving  the  Material 

In  receiving  material  and  supplies,  the  following  records 
are  usually  employed: 

1.  Receiving  record 

2.  Report  of  material  received 

3.  Invoices  from  creditors 

Receiving  Record 

It  may  be  necessary  in  some  industries  to  keep  a  separate 
receiving  record  of  all  packages,  boxes,  barrels,  cases,  and 
casks  of  goods  received.  This  record  should  show  the  date 
the  material  is  received,  the  concern  from  whom  it  is  received, 
and  the  number  of  packages,  boxes,  barrels,  etc.,  received. 
The  record  should  be  made  by  the  person  receiving  the  ma- 
terial. A  record  of  this  kind  is  kept  when  it  is  impossible  to 
inspect,  count,  and  check  promptly  all  the  material  received, 
and  it  is  very  simple  in  design.  Form  11  will  answer  the 
purpose  in  many  cases. 

Sometimes  the  receiving  record  takes  the  form  of  a  re- 
ceipt book,  each  receipt  of  material  being  recorded  in  this  book 
upon  a  separate  page.  In  most  instances,  it  is  used  for  tracing 
items  the  receipt  of  which  is  questioned.  It  is  of  little  value 
for  checking  invoices  received  from  the  selling  concerns  as 


MATERIAL  AND  MATERIAL  REPORTS 


73 


it  does  not  go  into  sufficient  detail.  For  this  purpose,  it  is 
necessary  to  use  a  more  specialized  form  of  material  received 
record. 


RECEIVING   RECORD 

No 

Date 

Received  from 

Address 

Number  and 
Kind  of 
Packages 

Description 

Signed 

Form  II.    Receiving  Record.    (Size,  6  x  4.) 

When  goods  are  not  opened  for  count  and  inspection  as 
soon  as  they  are  received,  it  is  often  necessary  to  accept  the 
invoice  temporarily  as  a  record,  checking  the  number  of  pack- 
ages as  shown  by  the  invoices  with  the  receiving  record  just 
mentioned.  It  may  then  be  necessary  at  a  later  date  to  make 
a  claim  for  "over,  short,  and  damage,"  which  is  discovered 
when  the  merchandise  and  supplies  are  actually  opened,  in- 
spected, and  counted. 


74  DETAILED  FACTORY  REPORTS 

Report  of  Material  Received 

When  a  thorough  inspection  is  made  of  material  received, 
the  results  are  often  reported  upon  an  especially  designed 
report  of  material  received,  this  report  being  prepared  by  the 
person  making  the  count  and  inspection.  The  advantages  of 
using  a  material  received  report  instead  of  checking  the  ma- 
terial directly  with  the  invoices  received  from  the  selling  con- 
cern, is  that  it  insures  an  actual  count  and  inspection  of  the 
merchandise  and  supplies  by  the  receiving  clerk,  which  is  not 
always  the  case  when  the  invoice  is  used. 

A  report  of  material  received  should  provide  for  a  record 
of  the  date  the  material  is  received,  the  name  of  the  concern 
from  which  it  is  received,  the  quantity  and  complete  descrip- 
tion of  the  material.  Provision  may  also  be  made  for  record- 
ing the  purchase  order  number  as  well  as  information  as  to 
the  cost  of  material  and  cost  of  handling,  including  freight, 
express,  and  cartage  costs.  If  the  material  is  specially  or- 
dered for  immediate  use  upon  a  particular  factory  order,  col- 
umns may  be  provided  on  the  material  received  report  for 
recording  the  distribution  and  charging  of  the  various  items 
of  material  cost.  The  material  received  report  should,  of 
course,  be  signed  by  the  person  preparing  it,  and  it  may  re- 
quire the  approval  of  some  person  in  authority,  who  then  also 
signs  the  report.  This  approval  is  necessary  when  the  de- 
tailed reports  are  prepared  by  some  clerk  acting  in  a  subordi- 
nate capacity.  Form  12  is  a  simple  form  of  the  report  of 
material  received. 

The  purchase  requisition,  purchase  order,  and  report  of 
material  received  should  act  as  a  complete  check  upon  every 
phase  of  a  purchase. 

It  is  often  advantageous  to  use  a  copy  of  the  purchase 
order  as  a  material  received  report.  If  this  can  be  done,  it 
eliminates  the  necessity  of  a  special  record  for  the  material  and 
supplies  received.    Any  additional  copies  of  the  purchase  order 


MATERIAL  AND  MATERIAL  REPORTS 


75 


needed,  containing  details  as  to  the  description  of  the  material, 
the  name  of  the  concern,  the  date,  the  purchase  order  num- 
ber, etc.,  are  prepared  by  means  of  carbon  paper  at  the  same 
time  the  original  copy  of  the  purchase  order  is  prepared.  The 
quantity  of  material  ordered  is  often  not  shown  upon  the  copy 


REPORT   OF   MATERIAL  RECEIVED 

No 

Received  from 

Address 

Purchase  Order  No 

Quantity 

Description  of  Material 

Date  Received Date  of  Invoice 

Date  Inspected Entered  on  Summary 

Form  12.    Report  of  Material  Received.     (Size,  8  x  5.) 


which  is  to  serve  the  purpose  of  a  report  of  material  received. 
This  copy  goes  to  the  receiving  clerk  or  to  the  person  who  in- 
spects and  counts  the  merchandise  and  who,  when  it  is  re- 
ceived and  the  count  and  inspection  are  made,  enters  the 
quantity  actually  received  upon  the  report.    The  receiving  clerk 


26  DETAILED  FACTORY  REPORTS 

is  thus  compelled  to  count  or  measure  the  material.  When 
the  merchandise  has  been  received,  counted,  and  inspected,  the 
copy  of  the  purchase  order  which  acts  as  a  material  received 
report  is  returned  to  the  office  for  the  purpose  of  checking 
it  with  the  invoice  from  the  selling  concern. 

All  material  received  reports  should  be  sent  to  the  office, 
where  they  can  be  checked  with  the  invoices  which  are  received 
from  the  creditors.  It  may  be  necessary  to  keep  a  copy  of  the 
report  of  material  received  at  the  place  where  the  form  orig- 
inated and  often  it  is  advisable  to  have  a  copy  of  the  form  pre- 
pared for  the  use  of  the  cost  clerk  or  stock-keeper  so  that  the 
proper  entries  can  be  made  upon  the  cost  summaries  and 
cost  records. 

Invoices  from  Creditors 

Invoices  received  from  creditors  should  be  passed  for 
entry  upon  the  general  and  cost  summarizing  records.  How- 
ever, before  these  invoices  are  approved,  they  should  be 
checked  with  the  purchasing  and  receiving  records.  The  ma- 
terial purchased  should  be  checked  as  to  the  kind,  quality,  and 
quantity  required,  ordered,  and  received.  The  price  as  shown 
upon  the  invoice  should  also  be  checked  with  the  price  as  shown 
upon  the  purchase  order  or  as  shown  by  the  office  price  rec- 
ords. After  the  quantity,  description,  and  price  have  been 
checked,  the  mathematical  calculations  should  be  verified. 

In  order  that  all  invoices  may  be  properly  checked  before 
they  are  passed  for  entry  and  payment,  it  may  be  advisable  to 
stamp  each  invoice  as  it  is  received  with  a  blank  form  provid- 
ing space  for  recording  upon  the  invoice  the  date  or  dates 
on  which  it  was  checked,  and  the  names  of  the  persons  who 
have  checked  the  various  features  of  the  invoice.  This  stamp 
may  be  designed  differently  to  meet  each  individual  require- 
ment. Form  13  shows  a  simple  design  which  may  be  used 
advantageously  in  many  cases. 


MATERIAL  AND  MATERIAL  REPORTS        'j'j 


Purchase  Order  No 

Receiving  Report  No 

Quantity  O.  K 

Price  O.  K 

Extensions  O.  K 

Charge  Account  No $. 

Charge  Account  No $. 

Charge  Account  No $. 

Purchase  Record  Entry 

Stock  Record  Entry 

Approved 


Form  13.    Invoice  Stamp.     (Size,  3  x  3.) 

Storing  Material 

In  storing  material,  two  classes  of  stock  records  are  usu- 
ally employed: 

1.  Bin  records 

2.  Stores  ledger  records 

Both  of  these  record  information  of  a  similar  character, 
but  the  bin  records  are  often  limited  to  quantities  only,  whereas 
the  stores  ledger  records  contain  more  complete  information, 
dealing  with  prices  and  costs  as  well  as  quantities. 

Bin  Records 

Raw  material  and  supplies  are  arranged  in  the  storerooms 
in  closets,  racks,  or  bins.  It  is  essential  that  the  bin  record 
be  tacked  in  a  convenient  place  where  the  material  is  stored. 
This  bin  record  should  provide  for  information  as  to  the  re- 
ceipt and  issuance  of  the  material.  Columns  may  be  provided 
for  showing  the  dates  and  the  quantities  of  receipts  and  with- 


78 


DETAILED  FACTORY  REPORTS 


drawals  and  the  quantities  on  hand.  These  entries  should  be 
made  upon  the  bin  record  daily  at  such  times  as  material  is 
put  into,  or  taken  out  of,  the  storerooms,  and  are  usually 
made  by  the  persons  who  handle  the  material.  Bin  records 
should  always  be  of  the  simplest  character  and  be  used  for 
checking  the  more  complete  transactions  shown  by  the  regular 
stores  ledger  records.  A  simple  bin  record  is  shown  in 
Form  14. 


ArticI 

BIN   RECORD 

No 

e Units.... 

1 

Date 

Quan- 
tity 
Received 

Quan- 
tity 
Issued 

Quan- 
tity 
On  Hand 

Date 

Quan- 
tity 
Received 

Quan- 
tity 
Issued 

Quan- 
tity 
On  Hand 









Form  14.    Bin  Record.     (Size,  6x8.) 

Record  of  Raw  Material 

The  record  of  raw  material  (Form  15)  is  one  of  the 
most  important  of  the  factory  documents.  This  record  is  also 
known  by  the  terms  "Stock  Record,"  "Stores  Ledger  Record," 
"Storeroom  Record,"  etc.  It  bears  the  same  relation  to  the 
stock  that  the  cash  book  bears  to  money,  and  therefore  should 
be  kept  with  equal  care.      Stock  represents  money  and   is 


MATERIAL  AND  MATERIAL  REPORTS 


79 


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8q       detailed  factory  reports 

only  another  form  of  it.  As  the  cash  book  shows  the  receipts 
and  disbursements  of  the  money  and  the  balance  on  hand,  the 
stock  record  shows  the  material  received,  material  used,  and 
the  balance  which  should  be  in  the  storeroom. 

The  effectiveness  of  the  stock  record  depends  very  largely 
upon  actual  storeroom  accommodations  and  upon  the  precau- 
tions taken  to  prevent  any  but  properly  authorized  persons 
from  removing  the  material  from  its  designated  place.  If 
access  to  the  storeroom  is  permitted  to  everyone,  material  is 
likely  to  be  taken  to  fill  orders  without  the  authority  of  a 
material  requisition.  Also,  if  access  to  the  stock  is  easily 
obtained,  the  men  will  often  replace  material  damaged  in  proc- 
ess without  making  a  record  of  the  material  withdrawn. 
Such  a  leak  is  serious  and  must  be  guarded  against  carefully, 
for,  if  it  exists,  it  both  falsifies  the  costs  and  causes  consid- 
erable trouble  in  the  cost  department. 

The  storeroom  should  be  centrally  placed,  unless  a  sepa- 
rate storeroom  is  conducted  for  each  department.  The  racks, 
bins,  etc.,  should  be  arranged  with  reference  to  the  materials, 
so  that  the  whole  will  be  orderly  and  not  look  like  a  junk  room. 
Disorder  in  appearance  tends  to  create  disorder  in  handling. 
Bin  records  and  finding  lists,  showing  the  location  of  the  stock, 
may  be  necessary  when  the  stores  are  complex  and  contain 
a  great  variety  of  articles  more  or  less  similar.  Special  store- 
rooms or  yard  places  should  be  reserved  fof  heavy  and  cum- 
bersome materials  close  to  the  place  where  these  materials  will 
be  needed. 

To  record  the  location  of  material  and  to  save  time  and 
space,  a  system  of  reference  numbers  and  letters  should  be 
devised.  Thus  if  B  is  the  symbol  for  "bolts,"  B-4-C-17  might 
mean  a  4-inch  bolt  in  division  C,  section  17,  of  the  storeroom. 
These  symbols  may  be  used  throughout  the  system  of  records 
and  accounts  and  result  in  a  great  saving  of  time  and  trouble. 

A  systematically  conducted  stock  record  performs  other 


MATERIAL  AND  MATERIAL  REPORTS  8l 

valuable  functions  besides  showing  leaks.  One  of  the  most 
important  of  these  is  to  provide  the  data  for  the  "perpetual" 
or  "going"  inventory.  The  troubles  of  inventorying  are  well 
known;  it  usually  takes  a  long  time,  causes  much  work,  and 
sometimes  necessitates  the  temporary  closing  of  the  plant. 
Even  then  the  accuracy  of  the  inventory  is  questionable,  yet 
its  information  is  essential  in  the  preparation  of  any  reliable 
statement  of  financial  standing  and  earnings.  With  a  well-kept 
stock  record  these  usual  inventory  troubles  are  avoided,  as  a 
complete  inventory  is  at  hand  at  any  time,  showing  both  the 
amounts  and  the  values  of  materials  in  the  storeroom.  To  do 
all  this,  the  record  must  be  designed  with  columns  for  ma- 
terial ordered,  received,  requisitioned  out,  and  balance  on  hand. 

Besides  these  columns  for  inventory  information,  extra 
columns  may  be  added  to  distinguish  between  material  re- 
served for  orders  already  received  and  the  balance  available 
for  new  orders.  This  distinction,  together  with  the  record  of 
the  maximum  and  minimum  amounts,  and  a  column  showing 
material  ordered  but  not  yet  received,  gives  all  the  informa- 
tion necessary  for  keeping  the  stock  supplies  up  to  working 
requirements  in  every  respect. 

When  the  same  article  is  carried  in  stock  in  numerous 
sizes,  colors,  or  styles,  it  is  sometimes  advisable,  for  easy  ref- 
erence, to  use  one  sheet  for  the  article  as  a  class,  and  group 
the  different  varieties  separately.  Active  stock  will  require 
separate  sheets  for  each  article ;  but  where  purchases  are  infre- 
quent and  the  stock  is  drawn  out  in  large  quantities,  one  sheet 
may  be  sufficient  for  several  articles,  blank  lines  being  left  on 
the  sheet  between  the  different  articles. 

The  stock  record  should  be  verified  from  time  to  time  by 
actual  weight,  count,  or  measurement,  so  that  any  discrepancy 
or  leak  may  be  discovered.  It  is  a  good  policy  to  verify  a  cer- 
tain number  of  articles  each  day  or  week,  without  letting  it  be 
known  in  advance  what  articles  are  to  be  inventoried. 


82  DETAILED  FACTORY  REPORTS 

Stock  records  may  be  designed  to  give  information  only 
as  to  the  quantities  of  material  and  supplies,  or  they  may  give 
the  values  as  well  as  the  quantities  of  the  material  on  hand. 

As  it  is  quite  usual  to  have  several  storerooms  in  one  in- 
dustry, it  is  often  advantageous  to  have  a  separate  set  of  stock 
records  for  each  storeroom.  Some  industries  are  so  organized 
that  storeroom  records  are  kept  for  the  main  storerooms  and 
an  entirely  separate  set  of  records  for  the  sub-storerooms. 

Whether  or  not  it  is  advisable  to  keep  one  set  of  stock 
records  or  several  distinct  sets  of  stock  records  depends,  to  a 
large  extent,  upon  the  physical  lay-out  of  the  plant.  As  cost 
accounting  deals  largely  with  the  analysis  and  control  of  sepa- 
rate detailed  items  of  cost,  it  is  always  advantageous  to  plan 
all  records  which  deal  with  factory  operations  so  that  dis- 
crepancies may  be  localized  and  responsibility  placed  upon  def- 
inite persons  in  the  organization. 

Issuance  of  Material 

The  issuance  of  material  from  the  storerooms  usually 
involves  the  following  forms  and  records: 

1.  Material  requisitions 

2.  Bills  of  material 

3.  Credits  for  material  returned 

Material  Requisitions 

A  material  requisition  (Form  16)  is  an  order  upon  the 
storeroom  for  a  certain  quantity  of  material  and  supplies 
needed  for  a  particular  purpose.  Material  requisitions  may  be 
used  as  requisitions  for  supplies  chargeable  to  an  expense  ac- 
count, or  for  materials  for  certain  definite  jobs,  orders,  or 
articles.  Such  requisitions  are  prepared  by  the  foremen  of  the 
operating  departments  and  by  the  heads  of  the  other  depart- 
ments of  the  organization.  They  are  formal  orders  upon  the 
storerooms,  approving  and  authorizing  the  issuance  of  the 


MATERIAL  AND  MATERIAL  REPORTS 


83 


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84  DETAILED  FACTORY  REPORTS 

material  for  which  they  call.  They  should  contain  detailed 
descriptions  of  the  materials  desired,  together  with  quantities. 

Often  a  requisition  is  issued  for  material  which  is  trans- 
ferred from  one  stock-room  to  a  sub-stock-room  or  to  a  par- 
ticular operating  department.  When  the  order  method  of 
cost-finding  is  in  use,  material  requisitions  are  usually  so  de- 
signed that  the  quantities  and  descriptions  of  the  material 
called  for  may  be  checked  up  with  the  requirements  of  the 
definite  factory  orders.  The  stock  clerk  should  check  the 
quantity  and  description  of  the  material  before  honoring  a 
requisition. 

Each  requisition  should  be  dated  and  numbered,  and  also 
should  be  signed  by  the  person  receiving  the  material  and 
should  bear  the  approval  of  some  person  in  authority.  A 
column  should  be  provided  for  recording  the  cost.  Form  i6 
shows  a  simple  material  requisition. 

Under  simple  conditions  of  manufacture  it  is  often  pos- 
sible to  combine  material  requisition  with  the  factory  order. 
In  small  organizations  where  all  product  manufactured  is  very 
similar  in  character,  the  combination  of  these  forms  is 
often  met  with.  In  large  manufacturing  industries,  where 
the  different  kinds  of  articles  manufactured  are  numerous 
and  the  work  done  is  special  and  standard,  such  a  combination 
cannot  be  made  profitably.  Under  such  conditions,  it  is  not 
unusual  to  see  five  or  six  different  kinds  of  material  requisi- 
tions, all  being  used  practically  in  the  same  manner,  but  each 
containing  information  of  a  particular  character. 

Material  requisitions  are  also  known  by  various  other 
names,  as  "Stores  Orders,"  "Material  Reports,"  and  "Requisi- 
tions for  Supplies." 

Bill  of  Material 

A  bill  of  material  (Form  17)  is  a  technical  term  which 
designates  a  standardized-material  requisition.    It  is  used  when 


MATERIAL  AND  MATERIAL  REPORTS 


85 


BILL   OF   MATERIAL 

Department 

No 

Cost  Department: 

The  following  articles  have  been  taken  from  Raw  Stock  for  the  pro- 
duction of  the  articles  mentioned : 

Articles  Produced 

Order  No 

) 

Ouantitv . 

^         ^ 1 

Quantity 

Classifica- 
tion No. 

Description 

V 

For  Office  Use 

Price 

Amount 

Charge  Account Entered  on  Cost  Record... 

Credit  Account Entered  on  Summary 

Entered  on  Stock  Record. 


Form  17.    Bill  of  Material.     (Size,  5  x  8.) 


the  materials  to  be  issued  have  been  standardized  both  as  to 
quantity  and  kind.  Therefore,  it  takes  the  place  of  material 
requisitions  in  factories  where  the  product  manufactured  is 
standardized,  the  same  articles  being  manufactured  repeatedly 
and  requiring  the  same  kind  of  raw  material  for  their  com- 
pletion. A  bill  of  material  is  prepared  for  each  article  manu- 
factured and  a  copy  is  given  to  the  stock  clerk.  When  a  pro- 
duction order  is  issued,  it  is  then  only  necessary  to  present  a 


86  DETAILED  FACTORY  REPORTS 

copy  of  this  crder  to  the  stock  clerk  who,  referring  to  his  bill 
of  material  for  information,  will  know  what  material  to  issue. 

No  material  should  ever  be  issued,  in  such  cases,  unless 
it  is  covered  by  the  bill  of  material.  Of  course,  it  is  always 
possible  to  use  a  supplementary  or  special  material  requisition 
for  material  to  replace  spoiled  or  defective  goods. 

When  many  different  kinds  of  material  are  used  in  the 
manufacture  of  one  article  and  the  product  of  the  plant  has 
been  standardized,  these  bills  of  material  may  be  printed  in 
quantities  as  there  is  practically  no  variation  in  the  estab- 
lished specifications. 

When  the  order  method  of  cost-finding  is  in  use,  the  bill 
of  material  given  to  the  stock  clerk  may  specify  the  order 
number  as  well  as  the  number  of  articles  to  be  manufactured. 
Then,  when  the  material  is  drawn  out  of  stock,  the  clerk 
should  check  it  with  the  production  order  and  obtain  a  receipt 
for  all  material  delivered.  Under  the  process  method  of  cost- 
finding,  material  obtained  from  stock,  as  shown  by  the  bills 
of  material,  is  chargeable  to  certain  definite  processes  of  manu- 
facture, this  information  being  obtained  from  the  bills  of 
material. 

Credit  for  Material  Returned 

When  material  is  returned  to  stock,  it  is  necessary  to  pro- 
vide for  a  storeroom  credit  slip.  This  form,  which  is  often 
termed  "Credit  for  Material  Returned"  (Form  i8),  should  be 
filled  in  by  the  person  who  returns  the  goods,  and  sent  to  the 
storeroom  with  the  material  which  is  returned.  It  may  then 
be  attached  to  the  original  requisition  or,  if  the  original  requi- 
sition cannot  be  located  readily,  this  form  should  be  posted 
and  summarized  separately  in  the  routine  of  the  cost  system. 

All  material  returned  should  be  deducted  from  the  cost 
of  the  material  which  has  been  charged  to  the  particular  order, 
job,  or  process. 


MATERIAL  AND  MATERIAL  REPORTS 


87 


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88  DETAILED  FACTORY  REPORTS 

The  credit  for  material  returned  should  contain  full  in- 
formation as  to  the  kind  and  quantity  of  such  material.  Each 
credit  should  be  properly  numbered,  dated,  and  approved,  and 
should  contain  the  signature  of  the  person  receiving  the  ma- 
terial in  the  storeroom. 

Disposition  of  Issued  Material 

All  material  which  is  issued  from  the  storeroom  is  not 
always  immediately  applicable  to  definite  jobs,  orders,  or  ar- 
ticles. Material  and  supplies  may  be  transferred  in  quantity 
from  the  storerooms  to  the  various  operating  departments  and 
be  stored  there  until  needed.  Therefore,  when  the  material  is 
definitely  used  in  the  manufacture  of  certain  definite  jobs,  or- 
ders, or  articles,  it  is  necessary  to  obtain  a  report  from  the  oper- 
ating departments,  and  especially  so  when  substitutions  of 
material  are  made  in  these  departments.  In  order  properly  to 
record  such  data,  two  additional  reports  are  employed — report 
of  material  used  and  interdepartmental  material  report,  dis- 
cussed below. 

Report  of  Material  Used 

The  report  of  material  used  (Form  19) — also  termed 
"Material  Report"  or  "Departmental  Material  Report" — 
shows  that  a  certain  quantity  of  a  particular  material  has  been 
used  on  a  definite  job,  order,  or  article. 

When  the  order  method  of  cost-finding  is  in  use,  all  ma- 
terials used  for  the  manufacture  of  certain  orders  should  be 
reported  on  this  form  and  their  costs  applied  to  these  orders 
or  jobs.  When  the  process  method  of  cost-finding  is  in  use, 
all  material  used  should  be  reported  so  that  its  cost  can  be 
applied  and  charged  to  a  definite  process  or  article. 

All  reports  of  material  used  should  be  properly  dated  and 
numbered.  They  should  show  the  names  of  the  departments 
in  which  the  material  is  used  and  provide  columns  for  record- 


MATERIAL  AND  MATERIAL  REPORTS 


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DETAILED  FACTORY  REPORTS 


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MATERIAL  AND  MATERIAL  REPORTS 


91 


ing  the  quantities  and  descriptions  of  such  material,  and  also 
provide  a  column  in  which  to  enter  its  cost.  These  reports 
should  be  signed  by  the  persons  preparing  and  approving  them. 

Interdepartmental  Material  Reports 

Interdepartmental  material  reports  (Form  20) — also 
termed  "Material  Transfer  Reports" — show  the  quantities  and 
kinds  of  material  which  are  transferred  from  one  storeroom 
to  another,  or  from  one  operating  department  to  another. 
These  reports  should  provide  for  recording  the  departments 
from  which  and  to  which  the  material  is  transferred,  and  for 
recording  the  cost  of  the  transferred  material.  These  reports 
should  be  properly  numbered  and  dated.  They  should  also 
contain  the  signatures  of  the  persons  preparing  and  approving 
them. 

In  some  plants  material  requisitions  or  the  report  of  ma- 
terial used  (Form  19),  may  be  employed  for  the  purpose  of 
recording  the  transfer  of  material  between  operating  depart- 
ments. 

Pricing  the  Material 

In  the  preceding  discussion  of  the  various  material  re- 
ports, reference  has  been  repeatedly  made  to  the  cost  of  the 
material.  The  cost  of  the  material  is  primarily  the  market 
price  at  the  time  the  purchase  is  made,  to  which  should  be 
added  freight  and  cartage  to  give  the  cost  delivered  at  the  yard. 

Often  raw  material  is  purchased  in  bulk  and  has  to  be 
sorted  and  graded,  and  at  such  time  has  to  be  revalued  accord- 
ing to  the  various  grades.  This  is  true  especially  in  the  case 
of  feathers,  tobacco,  and  wool  in  the  grease.  The  invoiced 
amount  of  the  material  purchased  must  then  be  adjusted  and 
allocated  over  the  various  grades,  so  that  the  total  amount  of 
the  invoice  will  be  in  agreement  with  the  costs  assigned  to  the 
various  grades. 


92 


DETAILED  FACTORY  REPORTS 


Complications  sometimes  arise  in  the  pricing  of  scrap 
material  which  is  used  in  making  by-products.  Generally 
the  percentage  of  scrap  to  material  is  used  in  arriving  at  the 
material  cost  of  the  by-product.  When  this  is  done,  the  cost 
of  the  by-product  is  then  deducted  from  the  cost  of  the  pri- 
mary product.  However,  often  there  is  no  way  of  determin- 
ing the  percentage  of  waste  used  except  at  a  considerable  ex- 
pense. Under  such  conditions,  the  scrap  value  is  estimated 
and  this  estimated  cost  is  applied  to  the  by-product  and  de- 
ducted from  the  cost  of  the  primary  product.  When,  how- 
ever, it  is  absolutely  impossible  to  estimate  the  cost  value  of 
the  material  which  goes  into  the  by-product,  the  amount  re- 
ceived from  the  sale  of  the  by-product  is  treated  as  sundry 
income  and  is  added  to  the  profit  from  operation  without  any 
consideration  being  given  to  the  material  cost  of  the  scrap 
or  waste  used  in  its  manufacture. 

In  considering  the  cost  of  material,  it  is  frequently  nec- 
essary to  make  a  provision  for  adding  the  storeroom  over- 
head, as  well  as  the  freight  and  handling  cost.  When  this  is 
done,  the  storeroom  overhead  is  distributed  and  added  to  the 
material  cost,  according  to  a  percentage  method.  In  some  in- 
dustries, however,  this  method  does  not  give  accurate  ma- 
terial costs,  for  high-priced  material  upon  which  there  may 
be  very  little  storeroom  work  is  then  taxed  with  too  large 
a  percentage  of  the  storeroom  overhead,  while  low-priced  ma- 
terial which  is  cumbersome  to  handle  and  requires  much  of  the 
stock-keeper's  attention,  might  not  be  charged  with  its  share 
of  the  storeroom  overhead.  If  it  is  impracticable  to  base  the 
distribution  upon  an  arbitrary  percentage,  the  charge  should  be 
absorbed  in  the  general  operating  expenses  and  in  this  way 
distributed  over  departments. 

The  market  price  of  material  often  fluctuates,  in  which 
case  there  are  several  methods  of  figuring  the  cost  of  the 
material   as    it   applies   to   the   particular   jobs,    orders,    or 


MATERIAL  AND  MATERIAL  REPORTS        93 

articles  manufactured.  The  one  method  provides  for  ascer- 
taining the  average  cost  of  all  material  of  a  certain  kind  on 
hand  at  such  time  as  any  of  the  material  is  issued  and  used. 
Another  method  provides  for  charging  the  material  to  the 
job  at  the  highest  value  and  using  up  the  higher-priced  mate- 
rial first.  Still  another  method  provides  for  charging  the  ma- 
terial cost  on  the  basis  of  the  prices  at  which  the  various  lots 
were  purchased.  This  latter  method  would  mean  that  the 
quantity  of  material  purchased  at  the  earliest  date  would  be 
priced  at  its  particular  price  until  this  first  lot  was  eliminated ; 
then  the  price  of  the  second  lot  would  be  used  until  it  too  was 
eliminated,  and  this  method  would  be  pursued  for  each  sub- 
sequent lot. 

No  matter  what  method  is  adopted,  when  an  inventory 


INVENTORY  TEST 

Department No 

Article Date.. 


Actual  Quantity Price  $ Amount 

Book  Quantity Price  $ Amount 

Difference  Quantity Price  $ Amount 

Remarks 


Taken  by Checked  by 

Priced  by Investigated  by.. 

Extended  by Approved  by 


Form  21.    Inventory  Test.     (Size,  8  x  5.) 


94 


DETAILED  FACTORY  REPORTS 


of  material  is  taken,  it  should  be  figured  at  cost  or  market 
value,  whichever  is  the  lower,  and  at  that  time  adjustment 
of  the  material  values  upon  the  various  stock  records  may  be 
necessary. 

Inventorying  the  Material 

When  a  complete  cost  system  is  in  operation,  the  cost 
records  provide  for  a  perpetual  inventory  shown  by  the  stock 
records.  If  this  perpetual  inventory  is  kept,  it  is  then  only 
necessary  to  test  the  various  items  of  raw  material  at  certain 
periods  during  the  year,  at  which  times  Form  21  may  be  used 
to  advantage.  The  book  quantity  is  then  compared  with  the 
actual  quantity  and  any  discrepancies  which  cannot  be  defi- 


INVENTORY   SHEET 

Department 

No. 


Listed  by 

Checked  by.. 
Priced  by 


Date.. 

Extended  by.. 

Added  by 

Approved  by. 


Quantity 


Description 


V 


Price 


Amount 


Form  22.    Inventory  Sheet.     (Size,  8  x  11.) 


MATERIAL  AND  MATERIAL  REPORTS  95 

nitely  located  should  be  adjusted  upon  the  factory  records 
and  accounts.  When  a  physical  inventory  is  taken  of  the  raw 
material  and  supplies,  the  items  should  be  counted,  listed,  and 
priced  at  a  certain  date.  All  this  information  may  be  re- 
corded upon  an  inventory  sheet  similar  to  Form  2.2.. 

Summary  of  Material  and  Material  Reports 

Form  2.}^  shows  the  various  steps  in  the  handling  of  ma- 
terial, and  the  material  reports  which  are  necessary  to  record 
material  costs. 

Procedure  in  Handling  Records 

The  procedure  in  handling  each  material  record  may  be 
standardized  and  would  then  be  as  follows : 

1.  Numbering  Reports.  A  definite  series  of  numbers 
should  be  allotted  to  each  kind  of  material  report  so  that  the 
office  will  know  whether  or  not  all  reports  are  being  received 
from  the  factory.  If  any  of  these  reports  are  spoiled  or  voided 
in  the  factory,  they  should  be  sent  to  the  office  so  that  all  re- 
ports can  be  accounted  for. 

2.  Collecting  Reports.  It  is  necessary  to  provide  a  well- 
planned  system  of  collecting  the  material  reports.  It  may  be 
necessary  to  collect  reports  at  the  end  of  each  day  or  at  the 
beginning  of  the  next  business  day,  or  even  several  times  dur- 
ing the  day  at  such  times  as  the  factory  messenger  makes  his 
usual  rounds. 

3.  Examining  Reports.  All  material  reports  which  are 
received  at  the  factory  office  must  be  examined  to  see  that  they 
are  properly  numbered  and  dated,  and  that  they  contain  a 
proper  description  of  the  material  to  which  they  relate.  They 
should  also  be  examined  to  see  that  they  are  properly  receipted, 
signed,  and  approved. 

4.  Pricing  Reports.     The  material  reports  which  record 


96 


DETAILED  FACTORY  REPORTS 


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MATERIAL  AND  MATERIAL  REPORTS  97 

the  information  as  to  costs  must  be  priced,  these  prices  being 
obtained  from  the  stock  cards  or  other  price  records. 

5.  Calculating  Reports.  The  material  reports  which  con- 
tain the  information  as  to  costs  must  be  calculated  so  that  this 
information  can  be  properly  posted  to  the  various  cost-sum- 
marizing records. 

6.  Posting  to  Stock  Records.  All  material  reports  which 
show  the  receipt  of  material  and  issuance  of  material  must  be 
posted  upon  the  stock  records,  so  that  the  movements  of  each 
item  of  raw  material  can  be  shown  upon  these  stock  records  at 
all  times. 

7.  Posting  to  Cost  Records.  The  material  reports  which 
contain  the  information  as  to  material  cost  must  be  posted  to 
the  various  cost  records — under  the  order  method  of  cost-find- 
ing, to  the  definite  cost  records  of  each  job  or  order;  under  the 
process  method  of  cost-finding,  to  the  particular  cost  record 
of  the  definite  process  or  article  affected. 

8.  Marking  Accounts  to  be  Charged  and  Credited.  Ma- 
terial reports  which  record  costs  give  the  amounts  to  be 
charged  and  credited  to  the  various  accounts,  and  upon  these 
reports  must  be  entered  the  information  as  to  the  accounts  to 
be  charged  and  credited. 

9.  Summarizing  and  Proving  for  Accounts.  After  the 
information  has  been  entered  upon  the  material  reports  as  to 
the  accounts  to  be  charged  and  credited,  they  should  be  sum- 
marized so  that  the  total  charges  and  total  credits  affecting 
various  accounts  may  be  ascertained. 

10.  Filing  Reports.  After  the  information  upon  the  re- 
ports has  been  transferred  to  the  proper  summarizing  records, 
they  may  be  filed.  It  is  well  to  provide  for  filing  each  kind  of 
report  in  a  distinctive  file;  i.e.,  the  material  requisitions  should 
be  filed  separately,  also  the  bills  of  material,  etc.  It  is  advan- 
tageous to  file  these  reports,  in  most  instances,  according  to 
the  report  numbers. 


CHAPTER  VII 

WAGE  SYSTEMS 

Kinds  of  Wage  Systems 

The  form  of  labor  reports  (to  be  discussed  in  the  follow- 
ing chapter)  will  depend  largely  upon  the  wage  system  used 
in  a  particular  industry.  As  it  is  necessary  for  a  cost  account- 
ant to  be  familiar  with  the  various  kinds  of  labor  reports  and 
devices  for  recording  the  cost  of  labor,  it  is  equally  necessary 
for  him  to  be  familiar  with  the  various  methods  of  paying 
wages.  Therefore,  the  wage  systems  which  are  most  com- 
monly employed  will  be  explained  briefly  in  the  present  chapter. 

No  one  system  of  wage  payment  can  ever  be  recom- 
mended as  the  best  for  all  conditions.  Each  has  its  charac- 
teristics which  are  peculiarly  suited  to  some  conditions,  and 
at  the  same  time  impossible  of  consideration  under  other  con- 
ditions. The  various  methods  of  paying  wages  considered 
here  are  as  follows: 

1.  Day-rate  system 

2.  Piece-work  system 

3.  Differential-piece-rate  plan 

4.  Premium  system 

5.  Bonus  system 

6.  Contract  system 

7.  Profit-sharing  plan 

8.  Stock-distributing  plan 

Several  other  wage  systems,  not  so  well  known  but  suc- 
cessful under  some  conditions,  are  also  briefly  described  in  the 
consideration  of  those  enumerated. 

The    foundation   of    these    systems    is   either   the    time 

98 


WAGE  SYSTEMS 


99 


consumed  or  the  quantity  of  work  done.  In  other  words,  the 
"time"  or  the  "piece"  must  furnish  the  basis  for  any  of  the 
systems  mentioned.  Each  of  these  designated  plans  is  sub- 
ject to  modification,  and  therefore  there  are  many  forms  of 
time  and  piece  methods  of  paying  wages,  as  well  as  various 
forms  of  premium  and  bonus  plans.  The  bonus  and  premium 
plans  are  known  by  various  terms,  and  are  often  named  after 
the  person  who  first  installed  them  or  tried  them  out. 

Day-Rate  System 

The  day-rate  system  provides  for  paying  each  workman 
a  predetermined  sum  for  a  certain  number  of  hours'  work. 
Therefore,  either  a  day  wage  is  established,  which  is  the 
amount  of  wages  a  man  receives  for  a  day's  work  consisting 
of  a  definite  number  of  working  hours ;  or  an  hourly  rate  may 
be  established  which,  multiplied  by  the  hours  in  the  working 
day,  gives  the  daily  wage.  The  wage  rate  under  either  plan 
depends  upon:  (i)  the  skill  called  for;  (2)  the  locahty  in 
which  the  plant  is  placed;  (3)  the  demand  for  labor;  and 
(4)  other  special  labor  conditions  which  may  exist  at  the  time. 

The  day-rate  system  is  the  one  most  commonly  used, 
and  is  the  original  method  for  paying  wages.  However,  since 
all  other  plans  have  been  devised  in  an  effort  to  get  away  from 
it,  it  is  fair  to  assume  that  there  are  gross  defects  in  the  sys- 
tem as  it  stands. 

Disadvantages  of  Day-Rate  System.  The  principal  dis- 
advantages of  the  day- rate  method  of  paying  wages  may  be 
summarized  as  (i)  lack  of  incentive  to  effort,  and  (2)  diffi- 
culty of  finding  labor  costs. 

Lack  of  incentive  on  the  part  of  the  workmen  is  tlie  one 
thing  that  has  caused  the  failure  of  the  day-rate  system  of 
paying  wages.  The  workman  has  little  or  nothing  to  gain  by 
doing  his  best,  putting  his  heart  into  his  job,  and  exerting  him- 
self.   He  is  kept  up  to  a  certain  dead  level  of  performance  by 


lOO         DETAILED  FACTORY  REPORTS 

the  fear  of  losing  his  job,  and  this  is  his  only  incentive  to  effort. 
Why  should  he  do  more  than  the  man  next  to  him  when  they 
are  both  paid  alike  ?  This  sort  of  reasoning  may  not  apply  to 
the  one  man  in  a  thousand  who  by  sheer  exertion  forges  ahead 
of  his  fellow-workers,  but  it  does  apply  to  the  great  mass  of 
workers  in  manufacturing  industries.  The  result  is  shown  in 
both  the  small  quantity  and  poor  quality  of  the  output. 

The  difficulty  of  finding  labor  cost  under  the  day-rate 
system  of  paying  wages  is  principally  due  to  the  fact  that  a 
uniform  labor  rate  per  day,  or  per  hour,  does  not  always  in- 
sure a  uniform  labor  cost  per  article.  The  wage  rate  may 
remain  the  same,  but  the  product  and  its  labor  cost  may  vary 
from  day  to  day,  and  often  this  variance  is  material  when 
comparison  is  made  of  the  work  done  by  different  men. 

Applicability  of  Day  Rate.  There  are  classes  of  labor, 
however,  for  which  no  other  kind  of  wage  system  is  practicable. 
Where  the  work  is  purely  a  function  of  time,  as  in  the  case  of 
firemen,  watchmen,  instructors,  foremen,  factory  clerks,  etc., 
the  simplest  and  most  practicable  method  of  paying  wages  is 
the  day-  or  time-rate  system.  The  work  of  repair  men  and 
men  who  plan  and  construct  special  machinery  is  also  usually 
paid  for  by  time  because  of  the  difficulty  of  reducing  such 
work  to  any  kind  of  piece  basis.  In  general,  indirect  labor  is 
more  suited  to  payment  by  time  than  direct  labor. 

Piece- Work  System 

A  piece-work  plan  is  a  system  of  paying  wages  on  the  basis 
of  the  amount  of  work  done.  A  rate  is  established  for  the 
various  operations  incidental  to  the  production  of  an  article, 
either  as  a  result  of  past  experience  or  by  means  of  a  special 
test.  Under  this  plan,  the  employer  makes  what  he  considers 
a  fair  estimate  of  the  time  required  for  each  operation,  or 
makes  a  special  test,  and  then  bases  the  piece-work  wages  upon 
the  results  of  this  estimate  or  test.  If  the  rate  is  fair,  the  entire 


WAGE  SYSTEMS  161 

arrangement  looks  so  equitable  that  it  may  be  surprising  to 
learn  that  in  many  cases  friction  and  dissatisfaction  have  arisen 
from  its  use.  In  answer  to  the  question  as  to  why  this  should 
be  so,  an  imaginary  case  may  be  considered,  which,  however, 
is  based  on  actual  experience. 

An  employer,  having  decided  to  introduce  the  piece-work 
system  in  his  business,  sets  out  to  determine  the  allowance 
or  rate  he  should  make  on  each  piece  of  work.  He  and  his  as- 
sistants watch  the  men  and  their  work  for  some  time ;  then  he 
makes  what  he  considers  a  fair  allowance  for  the  increased 
production  that  he  expects  will  follow  under  the  new  plan,  and 
waits  for  results.  Under  the  stimulus  of  payment  propor- 
tioned to  effort,  the  rate  of  production  soon  shows  enormous 
gains  and  the  employer  frequently  finds  that  production,  in- 
stead of  increasing  according  to  the  low  per  cent  he  allowed 
for  in  determining  the  new  rates,  has  increased  50%,  60%,  or 
has  even  doubled.  As  a  result,  men  who  were  earning,  say, 
$2.75  per  day,  are  soon  earning  $4  or  more. 

By  this  time  the  employer  is  likely  to  think  that  his  em- 
ployees cheated  him  in  the  beginning,  and  as  a  result  of  this 
are  now  receiving  altogether  too  much  pay ;  so  he  proceeds  to 
cut  the  rate  per  piece,  and  then  trouble  with  his  workmen 
begins.  They,  on  their  part,  soon  discover  that  they  are  be- 
tween two  fires;  if  they  produce  too  little  their  wages  are 
small,  and  if  they  produce  too  much  the  rate  is  cut,  after 
which  they  must  continue  to  work  harder  and  receive  no  more 
pay  than  formerly.  The  natural  result  of  this  is  an  agree- 
ment between  the  workmen  in  each  class  to  Hmit  their  pro- 
duction to  a  certain  amount  which  they  consider  safe.  At 
this  point  the  piece-work  system  breaks  down  and  fails  in  the 
purpose  for  which  it  was  introduced. 

In  the  above  instance,  the  conflict  of  interests  between 
employer  and  employees  is  evident.  The  employer  is  working 
for  the  largest  possible  results  for  a  given  wage  scale,  and 


102  DETAILED  FACTORY  REPORTS 

the  men  are  working  to  receive  the  maximum  wages  for  their 
time  and  work.  The  employer,  in  fixing  the  piece  rate,  does 
not  anticipate  that  wages  will  increase  much  over  what  they 
were  before,  or  at  least  not  in  the  same  proportion  as  the  pro- 
duction increases ;  so  he  fails  to  see  his  real  gain  by  the  change 
of  method.  The  workmen,  on  the  other  hand,  consider  that 
they  have  been  exploited  by  the  cut  in  the  piece  rate  and  are 
correspondingly  bitter  over  the  situation. 

It  is  clear  that  the  critical  point  here  lies  in  the  rate.  In 
the  example  given,  the  employer  was  ignorant  as  to  just  what 
the  men  could  do;  and  this  is  the  underlying  cause  of  trouble 
in  nine  cases  out  of  ten.  To  establish  a  satisfactory  piece- 
work system  it  is  essential  to  set  such  a  rate  that,  barring  ex- 
cessive business  depression  or  some  equally  unusual  condition, 
it  can  be  successfully  maintained.  If  the  employer  wishes  to 
approximate  maximum  production,  he  must  be  prepared  and 
willing  to  pay  more  than  the  ordinary  day  rate  he  paid  before ; 
and  no  piece-work  plan  will  attain  its  object  unless  he  takes 
this  stand.  If  he  can  afford  to  pay  a  certain  amount  for  the 
making  of  an  article  now,  he  can  surely  afford  to  pay  the 
same  amount  per  article  when  a  larger  number  are  produced 
per  day.  This  is  all  the  more  so  because  the  indirect  expenses 
are  increased  comparatively  little  by  the  increased  production 
in  a  given  period  of  time,  and  as  these  expenses  are  distributed 
over  a  larger  number  of  articles  produced,  the  cost  of  each 
article  is,  therefore,  proportionately  decreased. 

Method  of  Fixing  Piece  Rates.  The  first  step  necessary 
to  determine  the  proper  rate  is  to  get  true  records  of  the  work 
that  can  be  done.  In  the  matter  of  small,  or  wholly  machine- 
made  articles  this  is  not  difficult.  If  the  operations  are  com- 
plex and  include  much  handling  of  the  material,  it  will  be  nec- 
essary to  separate  the  whole  process  into  simple  operations 
and  fix  a  time  for  each.     The  sum  of  these  time  rates,  plus  a 


WAGE  SYSTEMS  103 

percentage  for  unavoidable  delays,  will  determine  the  time  to 
be  taken  on  the  article  as  a  whole.  These  analyses  are  all- 
important,  as  experience  has  shown  that  they  afford  the  most 
accurate  and  practical  method  of  fixing  a  fair  piece  rate.  The 
more  carefully  the  rate  is  fixed  in  the  first  instance,  the  less 
the  likeHhood  of  disagreement  later. 

Differential-Piece-Rate  Plan 

The  differential-piece-rate  plan  is  a  specialized  piece-work 
method  modified  by  an  application  of  time  rate  to  the  work. 
The  idea  is  to  pay  a  fixed  piece  rate  up  to  a  certain  amount  of 
production  in  a  given  time,  and,  if  by  rapid  work  the  employee 
can  produce  more  than  that  amount,  to  pay  him  a  higher  piece 
rate,  either  on  the  whole  amount  produced  or  only  on  the  out- 
put above  the  standard  set.  The  considerations  and  cautions 
mentioned  in  the  straight  piece-work  plan  are  all  applicable 
here,  and  with  double  force,  since  the  ideas  are  the  same  but 
emphasized. 

The  differential-piece-rate  plan  is  specially  devised  to 
speed  up  production  where  the  indirect  expenses  are  high  in 
proportion  to  material  and  labor  costs.  To  get  the  best  results 
in  such  a  case  the  productive  capacity  must  be  made  as  effec- 
tive as  possible,  even  at  a  higher  payment  for  labor  cost.  What 
is  lost  on  the  high  piece  rate  will  be  more  than  made  up  by  the 
distribution  of  the  large  amount  of  indirect  expenses  over  an 
increased  output. 

The  point  of  great  importance  in  the  differential-piece- 
rate  plan  is  the  making  of  a  fair  rate  at  its  introduction.  An 
ill-judged  rate  at  this  time  may  be  fatal  and  the  utmost  skill 
and  judgment  are  necessary  to  guard  against  such  a  mistake. 
The  plan  also  calls  for  a  well-organized  supervising  corps,  the 
actual  increase  of  cost  for  this  depending  entirely  on  local 
conditions,  the  nature  of  the  shop,  and  the  organization. 


104 


DETAILED  FACTORY  REPORTS 


Premium  and  Bonus  Systems 

The  premium  system,  together  with  its  modifications,  dif- 
fers from  piece-work  methods  in  basing  the  wages  primarily 
on  a  time  rate  instead  of  on  the  quantity  produced,  and  then 
paying  extra  wages  for  time  saved  in  the  operations.  It  re- 
sembles piece-work  in  that  it  presupposes  a  time  rate  on  the 
process  of  manufacturing  single  articles,  or  on  the  separate 
steps  in  such  processes.  The  fact  that  it  guarantees  a  mini- 
mum wage  places  it  in  a  more  favorable  light  before  employees, 
and  often  results  in  less  opposition  on  their  part  to  its  intro- 
duction than  they  show  toward  the  piece-work  plan. 

Linked  to  the  premium  plan  and  related  to  it  in  general 
principles,  are  the  several  forms  of  bonus  plans.  In  each  of 
these  plans  "there  is  an  increase  of  pay  as  the  time  to  do  a  defi- 
nite amount  of  work  is  shortened;  but  instead  of  being  cal- 
culated directly  from  the  time  saved,  it  takes  the  form  of  an 
increase  in  the  hourly  wages  for  the  time  actually  spent,  the 
rate  depending  upon  the  percentage  of  time  gained  and  in- 
creasing in  proportion. 

The  simplest  form  of  bonus  system  is  to  pay  each  work- 
man a  daily  wage  plus  a  piece  rate  on  each  unit  in  excess  of  a 
specified  minimum.  Thus,  a  laborer  receives  $1.50  a  day  for 
shoveling  earth,  and  on  each  cubic  yard  in  excess  of  15  cubic 
yards  per  day  he  receives  a  bonus  of  7  cents  per  yard.  If  he 
shovels  25  cubic  yards,  he  receives  $1.50  plus  $.70,  totaling 
$2.20  for  his  day's  work. 

The  differential-bonus  system  is  much  the  same,  except 
that  there  is  an  increasing  scale  for  increasing  performance. 
As  an  example,  the  workman  might  receive  7  cents  bonus  for 
every  cubic  yard  above  15,  and  an  additional  7  cents  bonus  for 
every  cubic  yard  over  20.  His  day's  pay  for  the  work  men- 
tioned above  would  then  be  $1.50  plus  $.35,  plus  $.70,  or  $2.55. 

The  Gantt  system  of  differential  payment  is  known  as 


WAGE  SYSTEMS  105 

"Task  Work  with  a  Bonus."  A  high  standard  is  set,  but  one 
entirely  possible  of  attainment.  The  workman  receives  a  regu- 
lar day  rate  and  in  addition,  if  he  reaches  the  standard,  he  is 
paid  a  bonus,  which  may  be  25%  or  ^^  1/3%  of  his  regular 
wages.  This  system  seems  to  have  worked  out  well  in  prac- 
tice; and  it  is  especially  recommended  as  a  good  transition 
step  from  the  old  day  rate  to  some  form  of  piece-work. 

A  very  important  feature  of  the  Gantt  plan  is  the  bonus 
that  the  foreman  gets  for  every  man  under  him  who  makes  his 
bonus.  Thus,  if  a  foreman  had  twelve  men  under  him  and 
eight  of  the  twelve  made  their  bonus,  the  foreman  would  get, 
say,  80  cents  bonus,  or  10  cents  for  each  man.  The  result  in 
practice  has  been  to  make  the  foreman  a  teacher  of  the  men, 
invariably  giving  his  attention  to  the  men  below  grade  in 
order  to  get  them  up  to  bonus  standard. 

In  the  "stint"  system  the  appeal  is  made  to  the  workman 
by  a  gift  of  all  the  time  he  may  save.  A  certain  output  is 
assigned  as  a  day's  work.  If  he  does  it  in  less  time,  say  7 
hours,  he  has  earned  his  wages  and  is  free  to  go  home. 

The  names  "merit,"  "standard  operation  plan,"  "gain- 
sharing,"  and  others,  are  sometimes  given  to  wage-payment 
plans  worked  out  in  particular  shops  or  industries.  If  they 
differ  at  all  from  plans  here  described,  it  is  only  in  details 
devised  to  meet  particular  conditions. 

Since  the  plans  described  as  "premium"  or  "bonus"  are 
so  closely  related  in  object  and  principle,  they  may  be  grouped 
together  for  comparison  with  other  methods. 

Introduction  of  System.  In  introducing  a  premium  or 
bonus  system,  the  same  caution  must  be  observed  as  with  the 
piece-work  systems.  It  is  essential  to  be  quite  sure  of  the  cor- 
rect standard  before  the  step  is  taken,  if  the  disastrous  results 
that  have  followed  too  high  piece  rates  are  to  be  avoided.  If 
an  error  is  made  on  the  side  of  too  high  a  scale,  it  is  less  costly 
than  in  piece-work,  because  the  employer  is  not  working  on  SQ 


lo6  DETAILED  FACTORY  REPORTS 

narrow  a  margin;  also  the  effects  of  such  an  error  would  be 
more  evenly  divided. 

Contract  System 

Under  the  contract  system  each  employee  is  regarded  as  a 
contractor  who  has  a  given  time  in  which  to  finish  a  definite 
job.  As  in  the  case  of  the  stint  system,  if  he  gets  through 
beforehand  he  has  earned  his  wages,  but  instead  of  leaving 
he  undertakes  a  new  contract.  In  some  cases  he  is  penalized 
if  his  work  is  not  done  in  contract  time. 

When  the  units  of  work  are  large,  the  foreman  often  be- 
comes the  contractor,  and  becomes  responsible  for  the  comple- 
tion of  the  job.  There  is  a  wide  amount  of  freedom  in  the 
arrangements  for  wage-paying  and  profit-making  between  him 
and  the  management.  Under  the  contract  system  in  its  simple 
form,  the  contractor  hires  his  own  men  and  arranges  the  work 
as  seems  best  to  him,  while  the  company  allows  him  a  certain 
amount  for  the  job.  Anything  that  he  saves  out  of  this  goes 
to  him  as  profit.  Strict  inspection  of  his  work  is  necessary, 
of  course,  to  hold  him  up  to  the  proper  standard. 

A  very  common  instance  of  a  contract  system  of  paying 
wages  is  in  the  building  trade,  where  the  main  contractor  has 
certain  sections  of  the  work  done  by  sub-contractors.  In  the 
garment  manufacturing  industry,  also,  the  contract  system  of 
paying  wages  is  used  where  outside  laborers  do  certain  opera- 
tions upon  the  various  garments  manufactured. 

Profit-Sharing  and  Stock-Distributing  Plans 

The  profit-sharing  plan,  as  its  name  implies,  provides  that 
the  workman  shall  share  in  a  certain  percentage  of  the  profits 
of  the  shop  or  factory  as  a  whole.  The  stock-distributing  plan 
makes  the  employee  a  part  owner  in  the  business,  and  so  gives 
him  an  interest  and  incentive  to  use  his  best  efforts  for  its 
welfare. 


WAGE  SYSTEMS  lO/ 

A  special  form  of  profit-sharing  which  has  proved  suc- 
cessful in  operation,  though  it  can  be  used  only  under  special 
conditions,  consists  in  setting  a  price  on  every  article  produced 
under  the  supervision  of  the  factory  management.  The  fac- 
tory is  charged  only  with  such  expenditures  as  relate  directly 
to  the  production  of  the  articles  and  is  credited  at  the  fixed 
scheduled  prices  for  articles  produced  whether  they  are  sold 
or  not.  At  the  end  of  the  year,  or  whenever  an  actual  in- 
ventory is  taken,  the  factory  account  in  the  ledger  shows  the 
difference  between  the  actual  cost  and  scheduled  prices — in 
other  words,  the  factory  profit.  This  profit  is  then  distributed 
among  the  foremen  of  the  various  departments  and  sometimes 
among  the  employees  as  well,  according  to  the  rate  of  pay  and 
total  wages  of  each.  A  penalty  is  provided  for  poor  attend- 
ance and  other  penalties  of  various  kinds  may  be  incorporated 
in  the  plan,  according  to  the  conditions  under  which  it  i? 
operated. 


CHAPTER  VIII 

LABOR  REPORTS 

Classification  of  Labor 

In  the  majority  of  manufacturing  industries  the  direct- 
labor  cost  is  more  readily  determined  than  is  the  cost  of  the 
direct  material.  This  is  especially  true  when  the  piece-work 
wage  system  is  in  operation,  as  under  such  conditions  the 
direct-labor  cost  can  be  computed  without  any  further  detailed 
analysis  or  compilation  than  that  involved  in  the  operation  of 
the  wage  system. 

As  a  matter  of  working  convenience,  the  various  labor 
operations  should  be  classified  and  a  well-defined  term  be  given 
to  each  operation.  In  addition  to  this,  it  is  often  advisable 
to  provide  symbols  or  numbers,  so  that  the  different  opera- 
tions on  each  article  manufactured  are  definitely  designated 
both  by  operation  name  and  by  operation  number  or  symbol. 
This  is  specially  important  where  the  product  manufactured 
is  standard  and  the  operations  on  the  products  and  parts  are 
continuous  from  day  to  day. 

Outside  and  Inside  Labor 

Two  classes  of  direct  labor  common  in  manufacturing 
establishments  are:  (i)  outside  labor,  (2)  inside  labor. 

Outside  labor  is  that  which  is  performed  outside  the  par- 
ticular manufacturing  plant,  as  in  the  garment  industry,  where 
much  of  the  hand  embroidery  work,  and  dyeing  and  bleaching 
operations  are  done  by  persons  who  do  not  form  part  of  the 
regular  factory  force.  In  recording  labor  costs,  provision 
must  be  made  for  both  outside  and  inside  labor  where  both 
exist. 

108 


LABOR  REPORTS 


109 


Direct  and  Indirect  Labor 

Labor  is  further  classified  into:  (i)  direct  or  "produc- 
tive" labor,  (2)  indirect  or  "non-productive"  labor. 

The  present  chapter  deals  mainly  with  direct  labor  costs 
and  reports,  as  this  is  one  of  the  prime  elements  of  cost.  In- 
direct or  non-productive  labor  is  treated  in  later  chapters  which 
deal  with  overhead. 

Direct  Labor  Reports 

Labor  reports  may  be  divided  into  two  classes:  (i)  re- 
ports used  for  pay-roll  purposesj;  (2)  reports  used  for  cost 
purposes. 

There  may  be,  and  frequently  are,  combinations  of  these 
two  classes  of  reports  whereby  one  report  will  answer  both 
purposes,  being  used  first  for  pay-roll  work  and  then  for  cost 
work. 

When  separate  reports  are  used  for  each  of  these  pur- 
poses, they  should  be  differentiated  by  distinctive  designa- 
tions. Reports  used  for  pay-roll  purposes  are  often  termed 
"Time  Reports,"  whereas  reports  used  for  cost  purposes  only 
are  more  frequently  known  as  "Work  Reports."  Time  and 
work  reports  are  also  often  designated  by  such  terms  as  "Job 
Tickets,"  "Work  Tickets,"  "Day- Work  Reports,"  "Piece-work 
Reports,"  "Laborers'  Reports,"  and  "Factory  Employees'  Re- 
ports." 

Before  taking  up  the  form  of  time  and  work  reports,  the 
time  and  general  method  of  reporting  labor  requires  considera- 
tion. 

Time  of  Reporting  Labor 

The  time  of  reporting  labor  depends  to  a  large  extent 
upon  the  pay-roll  system  used  in  a  particular  plant.  This  is 
usually  established  and  takes  precedence,  the  cost  accounting 
requirements  conforming  to  pay-roll  requirements.     In  other 


no         DETAILED  FACTORY  REPORTS 

words,  the  pay-roll  period  usually  determines  the  time  of  re- 
porting labor  costs  by  the  factory  employees.  Wages  may  be 
paid  weekly,  twice  a  month,  monthly,  or  shortly  after  comple- 
tion of  the  jobs,  orders,  or  articles,  and  reports  may  be  turned 
into  the  office  from  the  factory  at  these  times.  Where  it  is 
practicable  to  report  labor  daily  this  should  be  done,  especially 
in  factories  or  industries  where  a  large  number  of  employees 
are  working.  In  those  cases  where  the  employees  are  paid 
after  the  completion  of  a  certain  job,  order,  or  article,  it  may 
only  be  necessary  to  have  the  labor  reported  at  such  time  as 
the  particular  work  is  completed. 

Method  of  Reporting  Labor 

Labor  usually  constitutes  the  most  important  element  of 
production  cost,  and  small  variations  in  the  methods  of  hand- 
ling the  men  and  their  reports  lead  to  great  differences  in  re- 
sults. The  importance  of  the  matter  is  evidenced  by  the  large 
number  of  mechanical  devices  made  for  the  purpose  of  regu- 
lating labor,  and  for  gathering  and  compiling  labor  cost,  such 
as  time  clocks,  time  stamps,  patent  time  cards,  and  mechanical 
labor  cost  recorders  of  many  different  styles.  While  the  writ- 
ing of  the  reports  by  hand  is  the  most  common  practice,  it  is 
sometimes  contended  that  this  method  is  unreliable,  especially 
if  the  reports  are  made  out  by  the  workers  themselves.  If, 
however,  the  records  are  prepared  by  a  competent  clerk,  even 
though  by  hand,  accurate  costs  can  undoubtedly  be  established. 
Where  mechanical  devices  are  used,  it  is  clear  that  they  elimi- 
nate the  imperfections  of  labor  reports  prepared  by  hand; 
but  even  mechanical  devices  may  be  tampered  with  and  thus 
falsify  the  cost  figures  unless  the  mechanism  and  records  are 
carefully  inspected. 

The  complex  and  variable  conditions  which  exist  in  man- 
ufacturing industries  call  for  many  different  methods  and 
forms  for  reporting  and  recording  labor  costs.     It  is  often 


LABOR  REPORTS  HI 

necessary  to  use  several  different  kinds  of  time  and  labor  re- 
ports in  the  same  factory  according  to  the  different  require- 
ments of  the  various  operating  departments.  So  far  as  pos- 
sible, standard  sizes  of  time  reports  and  standard  methods  of 
reporting  labor  costs  should  be  adopted.  The  numerous  me- 
chanical devices  on  the  market  have,  to  a  large  extent,  affected 
the  standardization  of  the  forms  and  methods  of  reporting 
labor. 

Written  reports  may  be  made  for: 

1.  Each  individual  employee. 

2.  Small  groups  of  employees — often  termed  "gangs." 

3.  Large  groups  of  employees,  including  employees  of 

entire  operating  departments. 

These  reports  may  include  the  time  and  work  done  upon 
all  the  jobs,  orders,  articles,  or  processes  handled  during  the 
period  of  time  for  which  the  report  is  rendered;  or  separate 
reports  may  be  made  showing  the  time  and  work  done  upon 
each  job,  order,  or  article,  or  for  each  process. 

All  labor  reports  made  by  factory  employees  should  be 
approved  by  a  foreman  or  other  official  and  the  method  of 
recording  this  labor  should  be  properly  supervised  so  that  true 
and  accurate  costs  may  be  obtained  so  far  as  possible. 

The  successful  operation  of  any  system  of  reports  de- 
pends largely  upon  the  simplicity  of  the  records  used  and  the 
clearness  with  which  their  operation  is  explained.  Clerical 
labor  on  the  part  of  factory  employees  should  be  reduced  to  a 
minimum  so  as  not  to  take  up  the  time  of  employees  more  than 
is  absolutely  necessary,  and  whatever  writing  is  required 
should  be  simplified  as  much  as  possible  by  reducing  it  to  the 
entry  of  a  few  figures. 

In  many  lines  of  manufacture,  the  conditions  are  such 
that  a  workman  may  spend  only  a  few  minutes  on  a  single  job. 
In  such  cases  it  is  not  practicable  to  charge  this  direct  labor 


112         DETAILED  FACTORY  REPORTS 

cost  specifically  to  the  individual  job,  order,  article,  or  process, 
and  a  plan  must  then  be  arranged  for  its  distribution  over  a 
number  of  orders.  In  Chapter  V,  which  deals  with  factory- 
orders,  the  method  of  handling  numerous  small  orders  is  taken 

up- 
Verbal  labor  reports  are  inadequate  and  unsafe,  and 
should  be  discouraged  in  all  cases  if  correct  costs  are  desired. 
Employees  are  sometimes  permitted  to  report  their  time  ver- 
bally to  a  department  timekeeper  who  makes  the  written  rec- 
ord, but  this  is  unsatisfactory  and  unreliable.  The  tracing  of 
a  particular  item  in  dispute  is  then  difficult  and  often  leads  to 
unnecessary  argument  and  disagreement. 

Requirements  of  Labor  Reports 

The  principal  points  to  be  considered  in  choosing  or  de- 
signing labor  reports  are  covered  by  the  answers  to  the  follow- 
ing questions : 

1.  Is  the  form  to  show  productive  labor  only,  indirect 
labor  only,  or  a  combination  of  both  ?  Wherever  it  is  possible 
to  do  so,  indirect  or  non-productive  workers  should  report 
their  time  upon  separate  forms.  However,  if  indirect  or  non- 
productive time  appears  upon  a  productive  labor  report,  pro- 
vision must  be  made  for  summarizing  this  element  of  over- 
head so  that  it  may  be  included  among  the  factory  indirect  ex- 
penses and  be  distributed  properly. 

2.  Is  the  labor  report  to  show  time  only  or  both  time  and 
cost?  Factory  employees  engaged  on  productive  work  should 
be  required  to  report  only  the  time  spent  upon  the  particular 
job,  order,  or  article,  and  should  not  be  asked  to  calculate 
costs.  A  clerk  stationed  in  the  operating  department  may 
calculate  the  costs  upon  the  labor  reports  before  they  are  sent 
to  the  office. 

3.  Is  the  labor  report  to  show  the  time  daily,  weekly, 
twice  a  month,  or  monthly?     The  pay-roll  system  in  use  will 


LABOR  REPORTS  1 13 

give  the  answer  to  this  question.  Before  designing  any  de- 
tailed form  of  labor  report,  the  method  of  paying  wages  to  the 
factory  employees  should  also  be  given  careful  considera- 
tion. 

4.  Is  the  labor  report  to  be  filled  in  by  a  factory  employee, 
a  clerk,  or  will  a  mechanical  device  be  used  ?  As  already  sug- 
gested, handwritten  reports  are  likely  to  be  inaccurate,  and 
also  a  certain  proportion  may  be  "doctored"  by  unscrupulous 
employees.  Another  important  fact  is  that  the  writing  up  of 
records  diverts  productive  time  to  clerical  labor.  Mechanical 
devices  do  away  with  these  objections  to  a  large  extent.  While 
the  installation  of  mechanical  equipment  may  be  costly  at  first, 
it  saves  time  and  trouble  and  proves  to  be  less  costly  in  the  end. 
This  is  especially  true  if  the  factory  is  of  any  size  or  the  work 
is  complex. 

5.  Is  the  report  to  be  used  by  individual  employees, 
"gangs,"  or  department  groups?  In  small  factories  a  single 
combination  report  may  be  used  for  all  men  doing  the  same 
class  of  work.  This  report  can  so  be  arranged  as  to  provide 
all  the  necessary  information  for  pay-roll  purposes  as  well  as 
cost-finding  purposes.  In  large  manufacturing  industries, 
however,  it  is  often  necessary  to  provide  a  separate  time  report 
for  each  employee. 

6.  According  to  the  wage  system  in  use,  what  informa- 
tion, in  addition  to  time,  is  required  upon  the  labor  report? 
The  answer  to  this  question  depends  upon  whether  the  em- 
ployees are  paid  for  *'time"  or  for  "piece."  If  the  day-work 
or  premium  system  is  in  operation,  it  may  only  be  necessary 
to  show  the  time.  If  the  piece-work  plan  or  bonus  plan  is 
used,  the  report  should  show  quantities  and  time.  In  both 
cases  the  cost  and  amount  of  wage  is  left  to  the  cost  clerk  and 
pay-roll  clerk.  When  a  combination  system  of  paying  wages 
is  in  use,  an  additional  column  upon  the  report  gives  the 
necessary  information  as  to  cost  and  total  wages. 


114 


DETAILED  FACTORY  REPORTS 


7.  Is  the  labor  report  to  show  the  time  for  each  job,  order, 
or  article,  or  for  several?  The  labor  report  may  provide 
spaces  upon  the  one  form  for  recording  the  time  and  work 
done  for  the  several  jobs,  orders,  or  articles  worked  upon  dur- 
ing the  day,  or  it  may  be  more  advantageous  to  have  separate 
reports  in  each  case. 

To  sum  up,  it  may  be  said  that  the  method  of  reporting 
labor  should  be  so  devised  as  to  ascertain  the  cost  of  any  job, 
order,  or  article  as  a  whole  or  any  part  thereof,  or  on  any  oper- 
ation or  process,  with  the  least  possible  amount  of  writing  or 
figuring  on  part  of  the  employees. 


DAILY   LABOR 

Department 

REPORT 

Date 

Employee's    Name 

No 

Occupation 

Machine 

Order 

No. 

Description  of  Work 

Time 
Started 

Time 
Stopped 

For  Office  Use 

Elapsed 
Time 

Amount 

V 

Approved Entered  on  Sunmiaries. 

Wage  Rate Posted  to  Cost  Sheet 


Form  24.    Daily  Labor  Report.     (Size,  4  x  6.) 


LABOR  REPORTS 


115 


Form  of  Time  Report 

All  time  reports  should  be  dated  and  properly  numbered. 
They  should  contain  columns  or  space  for  recording  informa- 
tion as  to  the  exact  nature  of  the  work  done,  that  is,  the  desig- 
nation of  the  job,  order,  article,  or  operation.  Columns  should 
also  be  provided  to  record  the  quantity  produced,  the  period 


DAILY  PIECE-WORK   REPORT 

Department Date 

Employee's  Name No 

Operation Machine 

Article 

V 

Quantity 

For  Office  Use 

Rate 

Amoxmt 

V 

Approved Entered  on  Summary 

Entered  on  Pay-RoU Posted  to  Cost  Sheet 

Form  2  5.    Daily  Piece- Work  Report.     (Size,  4  x  6.) 

of  time  required  to  produce  it,  and  the  rates  and  amounts  of 
wages  in  dollars  and  cents.  The  information  as  to  rates  and 
wages  is  supplied  in  the  office. 

It  is  also  important  to  provide  for  the  approval  of  some 
person  in  authority,  and  all  reports  should  be  examined  and 


ii6 


DETAILED  FACTORY  REPORTS 


O  K'd  by  this  person  before  they  are  sent  to  the  office. 
Furthermore,  where  labor  reports  are  used  both  for  pay-roll 
and  cost  purposes,  it  is  often  necessary  to  provide  columns  for 
checking  the  postings,  so  that  an  examination  of  the  reports 
will  show  whether  or  not  the  information  has  been  properly 
transferred  to  the  pay-roll  and  various  cost  summaries. 

As  previously  stated,  time  reports  and  labor  reports  have 


JOB   TICKET 

Description  of  Work Order  No 

Employee's  Name No 

Operation Dept.  No Machine  No 

Quantities 

Time 

Wages 

Good 

Stopped 

Piece  Rate 

Defective 

Started 

Time  Rate 

Total 

Elapsed 

Amount 

Approved Cost  Sheet 

Entry 

Pay-RoU  Entry Summary  L 

^ntrv 

Form  26.    Job  Ticket.     (Size,  5  x  3.) 

become  more  or  less  standardized.  A  few  of  the  simplest 
forms  are:  the  daily  labor  report  (Form  24),  the  daily  piece- 
work report  (Form  25),  and  the  job  ticket  (Form  26).  In 
the  light  of  the  preceding  explanation,  the  operation  of  these 
forms  will  be  readily  understood.  They  may  be  developed  by 
the  addition  of  further  columns  and  spaces  for  recording  such 
special  information  as  may  be  required  for  the  particular  cost 
and  pay-roll  system. 

In  small  plants  where  conditions  are  simple,  it  is  often 


LABOR  REPORTS 


117 


practicable  to  combine  labor  reports  with  the  production  order, 
by  providing  the  latter  with  a  column  for  collecting  informa- 
tion as  to  the  amount  of  productive  time  spent  upon  the  work 
covered  by  the  order.  Under  complex  manufacturing  condi- 
tions it  is  impossible  to  use  a  form  of  this  kind  to  advantage. 

Pay-RoU  Exception  Report 

Labor  reports  should  be  made  for  every  factory  employee, 
but  in  the  usual  course  of  events  some  employees  will  be  ab- 


PAY-ROLL   EXCEPTION   REPORT 

Department 

Date No 

To  Pay-Roll  Department  &  Cost  Office: 

All  employees  in  my  department  were  present  full  time  with  the 
following  exceptions: 


Foreman 


Employee's 
No. 


Employee's  Name 


Remarks  as  to 
Irregularities 


Noted  on  Pay-Roll 

Noted  on  Cost  Summaries.. 


Form  27.    Pay-Roll  Exception  Report.     (Size,  5  x  8.) 


Ii8  DETAILED  FACTORY  REPORTS 

sent,  others  will  be  tardy  in  arriving  at  work,  while  others  will 
leave  for  an  hour  or  two  during  the  day  or  before  closing  time. 
Information  as  to  the  tardiness  and  absence  of  employees 
should  be  reported  to  the  office  by  a  foreman  or  department 
head  upon  a  pay-roll  exception  report  (Form  27).  It  is  true 
that  both  the  time-clock  records  and  the  employee's  labor  re- 
port should  show  this  information,  but  in  order  to  call  the 
particular  attention  of  the  cost  department  and  pay-roll  depart- 
ment to  these  irregularities,  they  should  also  be  reported  upon 
the  pay-roll  exception  report. 

Pay-roll  exception  reports  should  be  numbered  and  dated 
and  show  the  department  in  which  they  originate,  the  em- 
ployee's name  and  number,  and  all  irregularities  as  to  tardiness 
and  absence  from  the  plant.  Such  a  report  assists  the  cost 
department  when  summarizing  the  productive  labor  for  the 
purpose  of  comparing  its  cost  with  the  total  amount  of  wages 
paid  as  shown  by  the  pay-roll. 

Labor  Transfer  Reports 

Though  employees  usually  work  in  their  own  depart- 
ments, it  may  be  necessary  to  transfer  some  of  them  to  another 
department.  When  such  temporary  transfers  are  made, 
it  is  not  necessary  to  change  the  men's  numbers  and 
positions  on  the  pay-roll,  but  a  notification  should  be  sent  to 
the  office  so  that  their  wages  may  be  charged  to  the  department 
in  which  they  are  working. 

The  transfer  of  men  from  one  department  to  another  is 
generally  reported  upon  a  labor  transfer  report  (Form  28). 
This  should  be  properly  dated  and  numbered,  should  show  the 
department  in  which  the  man  is  usually  engaged  and  the  de- 
partment to  which  he  has  been  transferred,  and  contain  an 
approval  of  the  transfer  by  some  person  in  authority.  It  may 
be  necessary  to  provide  columns  on  the  report  for  recording 
information  as  to  time,  quantity  of  work  done,  and  its  cost 


LABOR  REPORTS 


119 


LABOR   TRANSFER   REPORT 

Department 

No 

Date 

Employee's 
No. 

Name 

Transferred  to 
Department 

Entered  on  Cost  Summaries: 

Foreman 

Form  28.    Labor  Transfer  Report.     (Size,  5  x  3.) 


Rate  Records 

It  is  usual  for  the  wage  rates  or  piece-work  rates  of  fac- 
tory employees  to  appear  upon  the  labor  reports  notwithstand- 
ing the  fact  that  in  many  cases  this  information  is  of  a  some- 
what confidential  nature.  It  is  obvious  that  it  is  necessary  to 
have  full  and  correct  information  as  to  the  different  wage  rates 
of  factory  employees  in  both  the  pay-roll  and  cost  departments. 
The  pay-roll  clerk  must  have  access  to  these  rate  records  in 
order  to  calculate  the  total  amount  of  wages  to  be  paid,  and 
the  cost  department  must  use  them  in  working  out  costs.  The 
rate  records  should  be  kept  up  to  date  and  all  increases  in  pay 
and  changes  in  piece-work  rates  should  be  sent  to  both  the 
pay-roll  and  cost  departments.  Such  a  record  also  gives  useful 
information  when  considering  the  granting  of  an  increase  in 
pay  to  employees  whose  length  of  service  merits  recognition. 


I20 


DETAILED  FACTORY  REPORTS 


The  form  used  for  keeping  rate  records  (Form  29)  shows 
each  employee's  number  and  name,  the  date  he  begins  his  em- 
ployment, and  in  the  last  two  columns  the  dates  and  the  in- 
creased rates  when  changes  are  made.  The  information  may 
all  be  recorded  very  satisfactorily  upon  separate  3x5  index 
cards.     In  some  cases  it  may  be  more  convenient  for  the  cost 


WAGE   RATE   RECORD 

Department 

Employee's 
No. 

Employee's  Name 

Wage  Rate 

Date 

Rate 

Form  29.    Wage  Rate  Record.     (Size,  8  x  11.) 


department  to  keep  wage  rates  in  a  loose-leaf  binder,  the  record 
for  all  employees  of  a  particular  department  appearing  on  one 
sheet.  If  this  is  done,  the  rate  record  may  then  be  of  letter- 
head size,  8x11. 

If  the  manufacturing  plant  is  large,  it  is  often  necessary  to 
have  several  copies  of  these  records  in  use  in  the  pay-roll  and 
cost  departments.  It  is  then  important  to  see  that  all  changes 
in  rates  are  recorded  upon  each  copy,  and,  to  insure  this,  the 
series  should  be  numbered. 


LABOR  REPORTS 


121 


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122  DETAILED  FACTORY  REPORTS 

Summary  of  Labor  Reports 

Form  30  summarizes  the  various  kinds  of  labor  reports 
and  the  routine  of  reporting. 

Procedure  for  Handling  Reports 

The  procedure  in  handling  labor  reports  may  be  sum- 
marized under  the  following  headings  : 

I.  Preparing  Reports.  Labor  reports  should  be  pre- 
pared, so  far  as  is  practicable,  in  the  office,  and  distributed  to 
the  factory  employees  before  they  start  work  in  the  morning. 
If  it  is  impossible  to  prepare  them  in  the  office,  they  may  be 
made  out  before  work  begins,  preferably  by  the  factory  clerks 
of  the  operating  departments,  or  otherwise  by  the  factory  em- 
ployees themselves. 

The  first  step  in  their  preparation  is  to  enter  the  date  and 
the  report  numbers,  together  with  the  names  and  numbers  of 
the  factory  employees  for  whom  they  are  intended.  Under  con- 
ditions where  work  is  planned  and  routed,  it  is  often  prac- 
ticable to  enter  also  the  job  numbers  and  descriptions  of  the 
operations  to  be  performed  by  each  employee. 

After  the  foregoing  details  are  entered  on  each  report 
and  work  is  ready  to  begin,  the  starting  time  is  recorded  and, 
as  soon  as  a  job  is  completed,  the  time  it  is  finished,  if  this  in- 
formation is  required.  If  the  quantity  produced  is  required, 
this  should  be  entered  upon  the  record  by  the  employee  or  fac- 
tory clerk  and  be  approved  by  an  inspector.  If  any  additional 
information  as  to  time,  quantity,  or  articles  produced  is  de- 
sired, this  should  also  be  entered.  An  important  point  to  ob- 
serve is  that  entries  should  be  made  either  before  work  starts 
or  as  soon  as  possible  after  its  completion.  They  should  not 
be  postponed  until  the  end  of  the  day,  when  the  tendency  is  to 
record  the  data  hurriedly,  and  too  often  to  rely  upon  inaccu- 
rate memory. 

The  time  tickets  which  are  used  in  connection  with  time 


LABOR  REPORTS 


123 


clocks  for  pay-roll  purposes  should  also  be  prepared  in  advance 
as  far  as  possible.  The  time  in  and  out  is,  of  course,  recorded 
by  means  of  the  clocks  as  the  employees  enter  and  leave  the 
plant. 

2.  Collecting  Reports.  Wherever  it  is  practicable,  the 
labor  reports  of  the  preceding  day  should  be  collected  by  fac- 
tory messengers  the  first  thing  in  the  morning.  Under  com- 
plex manufacturing  conditions  it  may  be  necessary  to  collect 
them  at  intervals  during  the  day,  the  collection  trips  being 
timed  as  required.  The  reports  for  each  department  should 
be  kept  separately,  but,  if  it  is  impracticable  to  sort  them  in 
the  factory,  they  may  be  classified  in  the  office. 

3.  Examining  Reports.  The  labor  reports  should  be  ap- 
proved by  a  foreman,  or  a  factory  clerk  who  is  authorized  to 
do  so,  before  they  are  collected.  Afterward  they  should  be 
examined  in  the  office  to  see  that  they  are  properly  numbered 
and  dated,  and  that  they  contain  all  information  required  for 
the  accurate  compilation  of  the  gay-roll,  cost  sheets,  and  cost 
summaries. 

4.  Pricing  Reports.  The  entry  of  the  rates  and  amounts 
earned  may  require  reference  to  rate  cards  giving  the  various 
wage  rates  which  may  be  based  on  time,  piece,  premium,  or 
bonus.  Accuracy  in  the  pricing  of  the  reports  is  essential,  and 
if  an  inexperienced  clerk  is  in  charge  of  the  work  his  entries 
should  be  carefully  checked. 

5.  Calculating  Reports.  After  reports  have  been  priced, 
they  are  ready  to  be  calculated.  This  includes  the  calculation 
of  the  time  or  quantity,  and  the  amount  of  labor  cost  to  be 
charged  to  each  job,  order,  article,  or  process.  If  the  day- 
work  plan  of  paying  wages  is  in  operation,  the  total  hours 
applied  to  the  various  jobs  worked  upon  during  the  day  should 
equal  the  total  working  hours  of  the  day. 

Experience  shows  that  the  calculation  is  facilitated  by  re- 
porting any  fractions  of  an  hour  in  tenths  or  twelfths ;  in  other 


124  DETAILED  FACTORY  REPORTS 

words,  when  the  tenth  of  an  hour  period  is  used  in  reporting 
time,  a  six-minute  charge  is  the  lowest  amount  of  time  appH- 
cable  to  any  job.  The  division  of  the  hour  into  tenths  permits 
of  decimal  calculations  which  save  considerable  time  in  figur- 
ing the  reports. 

The  amount  of  wages  due  may  be  readily  calculated  by 
means  of  a  wage  rate  table.  This  is  compiled  by  entering  the 
various  wage  rates  paid  across  the  top  of  a  sheet  at  the  head 
of  separate  columns.  At  the  extreme  right  of  the  sheet,  and 
on  the  horizontal  lines,  the  various  periods  of  time — five 
minutes,  or  six  minutes,  quarter  of  an  hour,  half  hour,  and  so 
on — are  entered  and  extended  at  the  various  rates,  so  that 
the  wages  for  any  period  of  time  and  for  each  rate  are  shown 
on  the  table. 

Reports  should  be  calculated  by  experienced  clerks  so  as 
to  guard  against  errors.  If  the  amount  shown  on  an  individ- 
ual report  proves  with  the  daily  wage,  this  may  be  taken  as 
proof  of  its  correctness.  To  guard  against  error,  however, 
whenever  piece-work  or  premium  or  bonus  systems  of  payment 
are  in  operation,  it  is  advisable  to  check  all  calculations,  par- 
ticularly when  no  mathematical  proof  of  the  figuring  is  pos- 
sible. 

6.  Indicating  Accounts  to  be  Charged.  After  the  reports 
have  been  examined,  priced,  and  calculated,  they  should  be 
arranged  or  marked  so  that  the  proper  ledger  accounts  may  be 
debited  with  the  labor  costs  chargeable  against  them.  This 
is  often  done  by  marking  each  report  with  an  account  number. 
If,  however,  the  department  number  and  designation  are  re- 
corded upon  the  report,  it  will  not  be  necessary  to  make  an 
additional  specific  mark  for  the  account  to  be  charged,  as  the 
department  number  and  name  will  give  all  necessary  informa- 
tion for  posting.  In  some  instances  it  is  possible  to  assign  a 
definite  series  of  numbers  to  the  employees  in  each  department, 
in  which  case  these  numbers  indicate  on  the  reports  the  de- 


LABOR  REPORTS 


125 


partment  in  which  the  employees  are  working  and  the  account 
against  which  their  wages  are  to  be  charged. 

7.  Posting  to  Pay-Roil  and  Cost  Records.  Where  the 
labor  reports  cannot  be  made  to  serve  the  dual  purpose  of  work 
records  and  pay-roll  records,  separate  time  reports  should  be 
made  out  for  pay-roll  purposes,  the  labor  reports  being  used 
for  cost  purposes  only.  In  this  case  the  cost  department  is 
only  interested  in  the  time  reports  in  so  far  as  the  information 
shown  thereon  proves  at  the  end  of  the  pay-roll  period  to  be 
in  agreement  with  the  time  recorded  on  the  labor  reports. 

Posting  to  the  cost  records  consists  in  entering  the  labor 
cost  upon  summaries.  The  total  of  this  should  be  in  agree- 
ment with  the  total  wages  paid,  as  shown  by  the  pay-roll 
records — the  analysis  of  labor  costs  being  prepared  at  the  same 
time  that  this  proof  is  established.  In  addition,  the  informa- 
tion shown  upon  the  detailed  labor  reports  is  posted  to  the 
cost  records  upon  which  is  compiled  the  cost  of  the  various 
jobs,  orders,  articles,  or  processes. 

8.  Filing.  Labor  reports  may  be  filed  by  date,  depart- 
ment, employee's  number  and  name,  or  by  factory  job,  order, 
process,  or  operation.  Any  system  which  permits  of  a  ready 
reference  to  the  reports  is  all  that  is  required.  Under  loose 
manufacturing  conditions,  the  records  are  often  tied  up  in 
bundles  and  relegated  to  a  shelf  in  a  general  storeroom.  This 
method  of  filing  entails  a  considerable  loss  of  time,  if  it  is 
necessary  to  refer  to  the  reports  at  a  later  date,  as  is  frequently 
the  case.  A  factory  foreman,  for  instance,  may  suspect  the 
cost  department  of  errors  in  posting  and  cannot  be  convinced 
until  he  sees  the  original  labor  reports.  It  is  obvious  that  a 
proper  filing  system  saves  both  time  and  trouble. 


CHAPTER  IX 
DEPARTMENTAL  APPLICATION  OF  OVERHEAD 

Classification 

As  stated  in  Chapter  II,  the  items  of  factory  overhead 
or  indirect  charges  consist  of  three  principal  subdivisions: 

1.  Indirect  material 

2.  Indirect  labor 

3.  Indirect  expense 

These  overhead  items  do  not  affect  all  departments  alike. 
Some  of  them  apply  to  all  and  others  only  to  particular  de- 
partments.    This  chapter  covers  their  application  in  all  cases. 

Indirect  Material 

Indirect  material  usually  includes  the  following: 

1.  Material  which  cannot  be  applied  as  a  direct  charge 

2.  Supplies 

3.  Scrap  or  waste  material 

4.  Small  perishable  tools  and  dies 

I.  Material  Which  Cannot  Be  Applied  as  a  Direct  Charge 

While  certain  classes  of  material  sometimes  used  in  manu- 
facture should  properly  be  applied  as  direct  material,  this  is 
not  always  practicable  because  of  the  clerical  labor  involved  in 
making  the  direct  charge.  (See  Chapter  11.)  In  such  cases 
these  items  are  preferably  treated  as  a  portion  of  the  factory 
overhead  under  the  caption  of  indirect  material.  If  any  of 
the  items  so  treated  are  used  in  only  one  operating  department 
of  the  plant,  they  are  chargeable  as  part  of  the  overhead  of 
that  department  alone,  and  not  as  general  overhead. 

126 


APPLICATION   OF  OVERHEAD 


127 


The  treatment  of  direct  material  items  in  this  manner 
has  been  subject  to  severe  criticism  by  cost  experts  who  appar- 
ently place  theory  above  common-sense.  It  is  not  a  question 
as  to  what  is  the  correct  method  according  to  theory,  but  as 
to  what  is  the  most  practical  way.  Manufacturing  conditions 
cannot  be  changed  nor  should  they  be  burdened  with  unneces- 
sary red  tape  for  the  sake  of  "system." 

2.  Supplies 

Factory  supplies  are  usually  required  in  every  operating 
department  of  the  plant.  They  consist  of  coal,  waste,  oil, 
brooms,  rags  used  for  polishing,  and  miscellaneous  supplies 
peculiar  to  the  operating  departments  of  various  lines  of  in- 
dustry. In  large  plants  the  supplies  used  during  the  year 
amount  to  a  considerable  sum.  They  are  often  requisitioned 
for  use  in  each  department  from  a  general  or  supplies  store- 
room, which  is  the  most  satisfactory  method.  In  small  plants 
this  plan  is  not  always  practicable;  here  supplies  are  usually 
purchased  for  each  operating  department,  the  charge  to  the 
department  being  made  direct  when  the  purchase  is  made. 
Care  must  be  exercised,  however,  that  too  much  is  not  charged 
during  any  one  particular  month,  as  for  instance,  when  a  stock 
of  miscellaneous  supplies  is  purchased  for  a  six  months'  period. 
In  such  a  case,  a  monthly  charge  must  be  made. 

When  it  is  impossible  to  charge  supplies  directly  to  de- 
partments, they  must  be  apportioned  more  or  less  arbitrarily. 

3,  Scrap  or  Waste  Material 

Scrap  or  waste  material  consists  of  what  is  left  after  grad- 
ing, cutting,  trimming,  sizing,  polishing,  or  treating  the  direct 
material.  In  industries  where  the  amount  or  scrap  is  negli- 
gible, its  cost  may  be  absorbed  in  the  direct  material  cost  and 
thus  be  included  in  the  prime  cost.  Where  the  scrap  material 
is  an  important  item,  a  careful  account  should  be  kept  of  it  in 


128  DETAILED  FACTORY  REPORTS 

order  to  guard  against  the  scrapping  of  too  much  material. 
Its  dollars  and  cents  cost  should  be  determined  and  charged 
to  a  Scrap  Material  account.  When  the  scrap  cannot  be 
utilized,  its  cost  may  be  absorbed  in  the  overhead  of  the  par- 
ticular department  in  which  the  waste  occurs.  Often,  how- 
ever, a  source  of  income  is  derived  from  the  sale  or  other 
utilization  of  material  which  has  been  scrapped. 

If  the  original  cost  value  of  scrap  material  has  been  ab- 
sorbed as  part  of  the  direct  material  cost,  any  income  derived 
from  its  sale  should  be  credited  to  a  "Sundry  Income"  account 
and  be  included  as  part  of  the  additional  income  in  the  profit 
and  loss  statement  of  the  business.  However,  if  the  cost  value 
of  the  scrap  material  sold  can  be  ascertained,  this  cost  value 
should  be  deducted  from  the  amount  received  and  the  profit 
or  loss  upon  this  scrap  material  may  then  be  ascertained  sepa- 
rately. Where  the  amount  received  from  the  sale  of  scrap 
material  is  small  as  compared  with  the  total  cost  of  material 
scrapped,  the  income  received  on  account  of  its  sale  may  be 
credited  to  the  overhead  account,  thus  reducing  the  total  over- 
head charge  applicable  to  the  operating  departments. 

Where  scrap  material  is  used  in  manufacturing  a  by-prod- 
uct or  in  making  other  articles  for  sale,  it  becomes  a  direct 
material  charge.  Its  cost  should  then  be  ascertained  so  that 
a  complete  scrap  stock  record  may  be  installed.  When  this 
procedure  is  followed,  scrap  will  be  requisitioned  out  of  stock, 
and  its  cost  will  then  become  a  direct  material  charge  to  be 
applied  to  the  particular  articles  manufactured  from  the  scrap. 

Under  some  manufacturing  conditions  it  is  impossible  to 
obtain  the  cost  of  scrap  material,  and  still  this  material  is  valu- 
able for  use  in  the  manufacture  of  other  products.  This  is 
true  in  the  embroidery  industry,  where  the  scrap  cloth  is  used 
to  manufacture  small  embroidered  pieces.  The  cost  of  such 
scrap  cannot  be  readily  ascertained,  and  therefore,  as  a  rule. 
no  cost  is  charged,  as  the  cloth  is  obtained  from  scrap  which 


APPLICATION  OF  OVERHEAD 


129 


is  practically  worthless  for  any  other  purpose.  In  cases  of 
this  character,  an  arbitrary  value  is  sometimes  placed  upon  the 
scrap  material  This  value  is  credited  against  the  cost  of  the 
original  article  and  charged  to  the  material  cost  of  the  smaller 
article  manufactured.  If  the  articles  which  have  been  manu- 
factured out  of  the  larger  pieces  of  cloth  cannot  be  credited 
with  the  charge  made  to  the  cost  of  the  small  embroidered 
pieces,  the  credit  must  be  made  to  a  "Sundry  Income"  account 
or  an  account  of  a  similar  character. 

4.  Small  Perishable  Tools  and  Dies 

Where  small  perishable  tools  are  employed  in  manufac- 
ture, they  may  be  included  as  an  item  of  overhead,  chargeable 
to  the  particular  department  in  which  they  are  used.  If  spe- 
cial tools  or  dies  are  purchased  or  manufactured  for  a  particu- 
lar job,  order,  or  article,  the  cost  of  such  tools  or  dies  may  be 
applied  to  the  cost  of  the  job,  order,  or  article  for  which  they 
are  procured.  However,  if  these  tools  or  dies  are  retained 
and  have  some  value  after  the  completion  of  the  particular 
job,  order,  or  article,  an  allowance  should  be  made  and  a  credit 
entry  passed  to  the  cost  of  the  completed  article.  This  credit 
allowance  will  usually  be  made  on  the  basis  of  scrap  value. 

The  value  of  any  tools  which  are  purchased  or  manufac- 
tured for  continued  use  should  not  be  included  in  the  factory 
overhead  unless  they  are  perishable  in  character.  Tools  or 
special  dies  which  can  be  used  for  a  long  period  of  time  should 
be  capitalized  at  a  conservative  value.  Any  deterioration  in 
the  value  of  these  tools  or  dies  should  be  considered  when 
establishing  depreciation  rates  applicable  to  capital  assets. 

Indirect  or  Non-Productive  Labor 

Indirect  or  non-productive  labor  includes  the  following : 
I.   (a)   Lost  time  and  idle  time  of  productive  workers 
(b)  Time  of  helpers,  sweepers,  truckers 


I30  DETAILED  FACTORY  REPORTS 

2.  Supervisors  and  foremen 

3.  Superintendence 

4.  Inspection   (when  not  considered  as  a  direct  laboi 

charge) 

5.  Factory  clerks 

6.  Employees  on  defective  work 

7.  Employees  on  experimental  work 

In  some  manufacturing  industries  all  such  labor  is 
grouped  under  the  one  caption  "Indirect  Labor,"  and  there- 
fore, whenever  it  is  necessary  to  investigate  an  increase  in 
indirect  labor  expenditures,  a  detailed  analysis  is  necessary 
in  order  to  ascertain  the  component  parts  of  these  expenditures. 
This  condition  can  only  be  remedied  when  a  basis  for  true 
comparison  is  obtainable,  and  such  an  important  overhead 
item  as  indirect  labor  should  be  classified  very  completely 
according  to  its  constituent  parts.  In  small  manufacturing  in- 
dustries it  may  not  be  necessary  to  have  as  elaborate  a  classi- 
fication of  indirect  labor,  and  in  these  cases  the  foregoing 
classification  may  be  somewhat  abridged. 

Where  bonuses  form  part  of  the  wage  payment  for  either 
productive  or  non-productive  labor,  it  is  often  impracticable 
to  charge  these  payments  to  the  accounts  to  which  the  original 
wages  were  charged.  Where  the  bonuses  are  based  directly 
upon  increased  production,  they  should  be  charged  as  part 
of  the  regular  wages.  If  the  bonuses  are  merely  intended  as 
an  incentive  to  regular  attendance  or  increased  production,  the 
amounts  so  paid  should  be  charged  as  factory  overhead  to  the 
departments  in  which  the  employees  are  engaged.  If  they  can- 
not be  so  apportioned,  they  should  be  charged  to  a  special 
account  and  distributed  over  the  various  departments  affected, 
upon  some  arbitrary  basis. 

Wherever  bonuses  are  in  the  nature  of  gifts  and  are  ex- 
ceptional, they  should  not  be  treated  as  part  of  the  factory 


APPLICATION  OF  OVERHEAD  131 

overhead,  but  should  be  considered  either  as  part  of  the  ad- 
ministrative expenses  of  the  business  or  as  a  distribution  of 
profits. 

I.  (a)  Lost  and  Idle  Time  of  Productive  Workers 

The  productive  employees  of  manufacturing  plants  often 
lose  considerable  time  while  awaiting  assignment  to  definite 
pieces  of  work,  or  while  repairs  are  being  made  in  the  fac- 
tory, or  because  of  unavoidable  interruptions  to  the  routine 
of  production.  The  idle  or  non-productive  time  which  is  the 
result  of  these  delays  should  be  charged  to  the  department  in 
which  the  employees  are  idle. 

While  it  is  true  that  as  much  of  the  time  of  employees  as 
possible  should  be  applied  to  some  definite  job,  order,  or  article 
if  actual  costs  are  to  be  ascertained,  this  does  not  mean  that 
idle  time,  lost  because  of  non-assignment  of  the  laborer  or 
because  of  a  temporary  shut-down  of  the  factory  or  a  depart- 
ment of  the  factory,  should  be  applied  and  absorbed  as  a  direct 
element  of  cost  in  order  to  charge  all  time  to  some  particular 
article.  It  is  far  more  important  to  know  the  amount  of  this 
idle  time  than  to  have  all  productive  time  treated  as  a  direct 
element  of  cost.  The  wastage  of  time  can  only  be  avoided  if 
the  time  so  lost  is  properly  recorded.  Labor  reports,  there- 
fore, should  always  provide  for  recording  the  idle  time  which 
cannot  be  charged  to  orders. 

Under  some  manufacturing  conditions,  factory  employees 
are  often  paid  an  additional  amount  of  wages  for  overtime  or 
for  special  work.  In  some  cases,  this  extra  wage  allowance 
may  be  properly  chargeable  as  a  direct  labor  cost,  but  in  other 
cases  this  excess  of  wages  must  be  absorbed  in  the  factory 
overhead.  If  overtime  work  is  a  common  occurrence  in  a 
large  plant  and  it  is  impossible  to  treat  it  as  a  direct  labor  cost, 
the  additional  wages  are  properly  included  as  a  non-productive 
labor  item. 


132 


DETAILED  FACTORY  REPORTS 


1.  (b)  Time  of  Helpers,  Sweepers,  Truckers 

Most  manufacturing  plants  have  certain  employees  who 
devote  all  their  time  to  work  of  a  non-productive  character, 
such  as  helpers,  sweepers,  and  truckers.  The  time  of  such 
employees  can  only  be  applied  in  an  indirect  manner,  and  there- 
fore must  be  considered  as  part  of  the  factory  overhead.  As 
far  as  possible  the  time  of  these  employees  should  be  charged 
to  the  department  in  which  they  are  ordinarily  engaged.  If, 
however,  they  are  transferred  from  one  department  to  another, 
it  may  be  necessary  for  them  to  keep  separate  and  distinct  time 
records  for  each  so  that  their  time  will  be  charged  correctly.  If 
it  is  impossible,  in  smaller  plants,  to  charge  the  wages  of  these 
employees  directly  to  operating  departments,  the  total  amount 
may  have  to  be  distributed  as  seems  most  equitable. 

2.  Supervisors  and  Foremen 

The  charge  for  supervisors  or  foremen  in  manufacturing 
plants  is  a  more  or  less  fixed  item.  This  charge  is  very  readily 
determined  for  each  operating  department  when  each  is  super- 
vised by  its  own  foreman  or  supervisor.  Under  some  condi- 
tions, however,  foremen  and  supervisors  devote  their  time  and 
attention  to  different  departments.  In  such  cases  an  arbitrary 
distribution  of  the  charge  may  have  to  be  made,  unless  it  is 
possible  to  establish  a  time  report  for  these  employees  so  that 
their  time  may  be  equitably  distributed  to  each  department  to 
which  they  devote  their  attention. 

3.  Superintendence 

Superintendence  does  not  include  the  items  of  supervi- 
sion or  foremanship,  but  is  restricted  to  such  items  as  the 
wages  paid  to  the  general  superintendent,  assistant  superin- 
tendent, and  production  manager.  These  items  apply  to  the 
entire  plant  and  in  most  industries  cannot  be  localized  and 
charged  to   a  particular  operating   department.     Therefore, 


APPLICATION  OF  OVERHEAD 


133 


they  should  be  absorbed  in  the  general  operating  expenses  and 
be  distributed  to  the  departments  upon  some  arbitrary  basis. 

4.  Inspection,  When  Not  Considered  as  a  Direct  Labor  Charge 

An  inspection  department  is  often  a  necessity  in  some 
manufacturing  plants,  in  which  case  the  inspection  time  may 
be  treated  either  as  a  part  of  the  direct  labor  cost,  or  included 
among  the  factory  overhead  expenses.  If  a  departmental  in- 
spector is  employed,  the  charge  could  properly  be  applied  to  the 
department  in  which  he  is  engaged.  Frequently,  however,  in- 
spectors travel  from  one  department  to  another.  It  is  often 
possible  to  keep  complete  time  and  work  reports  for  the  actual 
work  done  by  these  inspectors  so  that,  using  these  reports  as  a 
basis,  their  time  may  be  charged  to  particular  departments. 

Where  there  is  a  general  inspection  department  which 
cannot  be  treated  either  as  forming  part  of  the  direct  labor  cost 
or  as  a  departmental  overhead  charge,  the  cost  of  its  up-keep 
must  be  charged  as  equitably  as  possible  to  those  departments 
the  work  of  which  has  to  be  inspected. 

5.  Factory  Clerks'  Salaries 

Factory  clerks'  salaries  include  those  of  clerks  who  are 
engaged  in  the  operating  departments,  cost  department  clerks, 
storeroom  clerks,  pay-roll  clerks,  and  miscellaneous  clerks  em- 
ployed in  various  non-productive  capacities.  Their  salaries 
should  be  charged  to  the  respective  departments  with  which 
they  are  connected.  The  salaries  of  those  who  work  in  the 
productive  departments  should  be  charged  directly  thereto. 
The  time  of  factory  clerks  who  are  not  wholly  occupied  in  one 
operating  department,  should  be  reported  so  as  to  permit  their 
salaries  to  be  distributed  as  seems  to  fit  the  needs  of  the  case. 

In  considering  whether  a  clerk's  time  is  properly  charge- 
able as  part  of  the  factory  overhead,  the  actual  facts  in  the 
matter  must  be  reviewed.     If  the  work  done  by  the  clerk  is 


134 


DETAILED  FACTORY  REPORTS 


of  art  administrative  character  and  has  no  connection  either 
directly  or  indirectly  with  the  producing  of  the  goods,  the  time 
should  be  applied  as  part  of  the  administrative  expense.  If, 
however,  a  clerk  is  connected  with  the  factory,  and  assists 
either  directly  or  indirectly  in  the  actual  production,  his  time 
should  be  absorbed  in  the  factory  overhead. 

6.  Employees  on  Defective  Work 

The  treatment  of  defective  work,  as  a  whole,  depends 
upon  the  nature  of  the  product  manufactured  and  upon  the 
amount  and  kind  of  defective  work.  Under  some  manufactur- 
ing conditions,  many  slight  defects  in  the  product  are  corrected 
by  two  or  three  men  who  devote  all  their  time  to  this  kind  of 
work.  In  the  language  of  the  factory  they  are  called  "doc- 
tors," in  the  sense  that  they  remedy  defects  in  the  product. 

Under  conditions  where  standard  products  are  manufac- 
tured, the  time  of  these  employees  cannot  be  applied  directly, 
and  therefore  it  must  be  absorbed  in  the  factory  overhead.  If 
the  time  of  these  employees  can  be  applied  to  a  particular  oper- 
ating department,  it  should  be  absorbed  in  its  overhead.  If, 
however,  the  cost  of  correcting  the  defects  is  a  general  operat- 
ing expense,  it  must  be  arbitrarily  distributed  over  the  operat- 
ing departments. 

When  the  correction  of  such  defective  work  necessitates 
a  considerable  amount  of  extra  labor  and  involves  an  addi- 
tional routing  of  the  product  through  the  factory  departments, 
the  defective  work  should  be  recorded  upon  a  separate  factory 
order  and  the  cost  of  correcting  these  defects  should  be  applied 
separately  in  the  same  way  that  the  costs  are  applied  to  any 
other  special  order. 

7.  Employees  on  Experimental  Work 

Just  as  there  are  employees  who  devote  all  their  time  to 
defective  work,  so  there  are  employees  who  devote  all  their 


APPLICATION  OF  OVERHEAD 


135 


time  to  experimental  work  with  a  view  to  improving  the  prod- 
uct, process,  or  equipment.  The  salaries  of  such  employees, 
whose  time  cannot  be  treated  as  productive  and  applied  to  any- 
definite  job,  order,  or  article,  must  be  treated  as  indirect  labor 
and  absorbed  in  the  factory  overhead. 

The  time  of  these  experimental  workers  is  sometimes  con- 
fined to  a  certain  definite  operating  department,  affecting  only 
the  articles  there  manufactured.  If,  however,  this  is  not  the 
case,  and  the  time  charge  cannot  be  specifically  applied,  it  must 
be  distributed  as  overhead. 

If  the  experimental  work  is  costly  in  character  and  em- 
bodies the  improvement  of  some  one  particular  process,  article, 
or  machine,  a  factory  order  should  be  issued  for  such  work, 
and  all  applicable  costs  for  material,  labor,  and  overhead 
should  be  charged  to  that  particular  order.  This  will  give  the 
total  cost  of  the  experimental  work  on  that  order.  After  as- 
certaining this,  it  can  then  either  be  capntaiized  or  be  charged  /^ 
to  the  operating  department  or  product  manufactured  by  being 
absorbed  in  the  overhead  for  a  definite  period  of  time. 

Indirect  Expenses 

The  items  of  indirect  expenses  which  compose  the  factory 
overhead  may  be  classified  as  follows: 

1.  Rent 

2.  Insurance — fire  and  liability 

3.  Taxes 

4.  Interest 

5.  Power 

6.  Light 

7.  Heat 

8.  Freight  and  cartage  inward,  when  not  considered  as  a 

part  of  direct  material  charge 

9.  Over,  short,  and  damage 


136         DETAILED  FACTORY  REPORTS 

10.  Miscellaneous  factory  expenses 

11.  Depreciation 

12.  Maintenance,  repairs,  and  renewals 

Items  numbered  i  to  10  will  be  separately  considered  in 
this  chapter,  leaving  for  discussion  in  the  following  chapter 
the  important  subject  of  degreciation  and  maintenance. 

1.  Rent 

The  item  of  rent  is  more  or  less  fixed  as  to  amount.  This 
item  is  applicable  to  all  departments  of  the  business,  including 
the  selling  and  administrative  as  well  as  the  various  factory 
departments.  The  most  practical  method  for  the  distribution 
of  the  rent  charge  is  that  which  is  based  upon  the  proportion 
of  floor  space  occupied.  Consideration  must  always  be  given, 
however,  to  the  more  desirable  floors  and  the  more  desirable 
locations  of  the  different  departments.  In  other  words,  the 
same  rate  per  square  foot  should  not  be  used  throughout  the 
entire  plant  for  every  floor.  On  the  contrary,  a  sliding  scale 
should  be  established  so  that  the  various  locations  throughout 
the  plant  will  bear  rates  per  square  foot  depending  upon  their 
desirability. 

\¥hen  the  rent  item  is  fixed,  and  the  space  assigned  to 
each  particular  department  is  also  fixed,  a  schedule  of  the  rent 
charges  may  then  be  established;  and  this  fixed  schedule  may 
be  used  until  changes  in  the  amount  of  rent,  or  changes  in  de- 
partmental space,  require  a  new  distribution  of  this  charge. 

When  the  building  is  owned,  items  in  lieu  of  rent,  such 
as  interest  on  mortgage  and  taxes  on  real  estate,  may  be  dis- 
tributed over  the  various  departments  of  the  plant  upon  the 
basis  of  the  floor  space  occupied  by  each. 

2.  Insurance — Fire  and  Liability 

The  fire  insurance  charge  includes  the  amount  paid  for 
insurance  upon  buildings,  equipment,  and  merchandise  stock. 


APPLICATION  OF  OVERHEAD  137 

When  blanket  policies  covering  insurance  on  all  of  these  items 
are  issued,  the  entire  amount  of  insurance  paid  is  to  be  ab- 
sorbed in  the  factory  overhead  and  it  is  often  difficult  to  estab- 
lish a  basis  for  the  charge  to  the  various  departments  of  the 
plant.  The  total  value  of  the  machinery,  equipment,  and  ma- 
terial stock  carried  in  a  department,  plus  a  value  for  the 
building  in  which  the  department  is  located,  usually  provides 
a  satisfactory  basis  for  the  distribution  of  the  insurance  charge. 

When  separate  insurance  policies  are  issued  for  the  stock, 
the  buildings,  and  the  equipment,  the  insurance  charge  may  be 
apportioned  more  accurately.  The  insurance  of  the  stock  may 
be  distributed  to  the  departments  upon  the  basis  of  the  value 
of  stock  carried  in  each;  that  of  the  equipment,  on  the  valua- 
tion of  the  equipment  installed  in  the  departments;  and  the 
insurance  on  the  buildings,  by  some  arbitrary  method. 

Liability  insurance  affecting  factory  employees  should  be 
included  in  the  factory  overhead  and  distributed  according  to 
the  amount  of  wages  chargeable  to  each  department. 

3.  Taxes 

Taxes  are  varied  in  character  and  include  local,  city,  and 
town  taxes,  state  taxes,  and  United  States  Government  taxes. 
Income,  excess  profits  taxes,  and  capital  stock  taxes  are  not 
proper  charges  against  cost  and  should  not  be  included  in  the 
factory  overhead.  They  are  deductions  from  the  undivided 
profits  and  should  be  so  treated  upon  the  financial  records. 

Real  estate  taxes  may  be  considered  as  payments  in  lieu 
of  rent,  and  as  such  distributed  to  the  departments  affected 
upon  the  basis  of  the  space  occupied  by  each.  Taxes  upon  the 
valuation  of  the  machinery  and  equipment  may  be  distributed 
according  to  the  value  of  such  machinery  and  equipment  used 
in  each  department  of  the  plant.  If  these  items  cannot  be 
distributed  upon  the  basis  of  floor  space  or  value  of  equipment 
they  must  be  applied  upon  some  arbitrary  basis. 


138  DETAILED  FACTORY  REPORTS 

4.  Interest 

Whenever  interest  on  the  value  of  plant,  machinery,  and 
equipment  is  to  be  treated  as  part  of  the  cost,  it  should  be  in- 
cluded in  the  overhead  of  the  various  departments,  the  distri- 
bution being  made  in  proportion  to  the  valuation  of  the  equip- 
ment used  in  each. 

The  question  of  interest  in  its  relation  to  cost  of  produc- 
tion has  probably  been  discussed  at  more  length  than  any 
other  subject  in  cost  accounting,  and  concerning  no  other  sub- 
ject is  there  such  a  wide  difference  of  opinion.  From  statistics 
gathered  in  this  connection,  it  would  appear  that  of  the  ac- 
countants who  have  expressed  an  opinion  on  this  subject,  about 
60%  are  in  favor  of,  and  about  40%  opposed  to,  the  inclu- 
sion of  interest  as  a  cost  of  production.  It  should  be  noted, 
however,  that  90%  of  the  accountants  who  have  specialized  in 
cost  accounting  advocate  its  inclusion  as  a  part  of  cost,  and 
the  same  percentage  prevails  among  manufacturers  generally. 
The  writer's  personal  opinion  is  that  the  full  expense  of  oper- 
ating a  plant  should  be  charged  against  the  cost  of  the  product, 
if  true  costs  are  to  be  obtained.  As  it  is  just  as  necessary  to 
pay  for  buildings,  land,  and  machinery  as  it  is  to  pay  workmen 
for  manufacturing  a  product,  interest  on  the  capital  investment 
should  be  considered  in  ascertaining  costs,  especially  where  the 
value  of  the  investment  required  for  the  manufacture  of  some 
articles  is  greater  or  less  than  that  required  for  the  manufac- 
ture of  other  articles. 

To  illustrate  this  point  it  may  be  assumed  that  a  factory 
is  producing  articles  of  different  kinds,  some  of  which  necessi- 
tate the  use  of  expensive  machinery  or  equipment,  while  others 
are  largely  the  product  of  hand  labor,  or  cheap  machinery. 
If  the  different  values  invested  are  not  taken  into  considera- 
tion, the  distribution  of  the  indirect  expenses  will  not  show  the 
true  variation  that  exists  in  the  cost.  An  unequal  burden  is 
clearly  the  result  of  the  differences  in  investment,  and,  since 


APPLICATION  OF  OVERHEAD 


139 


these  inequalities  are  a  direct  result  of  using  different  kinds  of 
equipment,  it  seems  that  interest  on  the  investment  in  equip- 
ment should  be  considered  as  one  of  the  elements  of  cost. 

Of  course,  if  the  equipment  is  uniform,  or  if  all  the  out- 
put passes  through  the  same  processes,  there  is  no  essential 
difference  between  including  interest  as  a  cost  or  leaving  it  for 
later  consideration  when  fixing  the  selling  price  of  the  product. 
Since,  however,  in  either  case  the  amount  invested  must  be 
considered  in  determining  the  selling  price,  there  still  remains 
the  necessity  of  determining  the  method  of  calculating  the  in- 
terest. This  may  be  based  on  values,  or  on  time,  or  on  other 
conditions  of  manufacturing.  The  difference  of  opinion,  then, 
centers  on  what  is  the  best  method  of  applying  this  charge  to 
the  cost;  that  is,  whether  it  should  be  included  among  the 
regular  cost  items  or  be  added  to  the  cost  in  a  statistical  re- 
port.* 

The  writer's  attitude  on  this  question  has,  at  times,  been 
misunderstood.  He  has  never  advocated  the  charging  of  in- 
terest on  the  capital  invested  as  a  whole,  but  only  on  the  per- 
manent or  fixed  assets  used  in  manufacturing;  that  is,  land, 
buildings,  machinery,  and  equipment.  He  has  never  advo- 
cated interest  on  inventories  of  raw  material  and  supplies,  ac- 
counts receivable  outstanding,  or  any  other  form  of  floating 
capital  investment.  Ignoring  all  economic  arguments  in  con- 
nection with  this  subject,  and  confining  it  strictly  to  its  rela- 
tion to  the  fixing  of  a  selling  price,  the  writer  is  firmly  of  the 
opinion  that  it  is  necessary  to  consider  interest  in  this  con- 


•To  attempt  to  cover  the  arguments  for  and  against  the  inclusion  of  interest  as  a 
cost  would  require  a  volume.  Readers  who  wish  to  study  this  question  will  find  the 
following  references  helpful: 

Factory  Accounts,  by  Garcke  and  Fells,  page   140. 

Commercial   Organization   of  Factories,  by  H.   Spencer,  page   150. 

Cost  Keeping  and  Management  Engineering,  by  Gillette  and  Dana,  pages  14 1 
and  142. 

Factory    Organization   and    Administration,    by    H.    Diemer,    page   212. 

Cost  Accounts,   by   L.   W.   Hawkins,   page    109. 

Cost  Keeping  and  Scientific   Management,  by  H.  A.   Evans,  page  37. 

Depreciation   and  Wasting  Assets,   by   P.   D.   Leake,   pages  53   and   54. 

Bookkeeping  and  Cost  Accounting,   by  Wm.   Kent,  page   128. 


I40 


DETAILED  FACTORY  REPORTS 


nection  in  order  to  determine  what  would  be  a  fair  profit  in  a 
given  case. 

Possibly  the  majority  of  the  opponents  of  interest  as  a 
manufacturing  cost  would  not  object  to  its  inclusion  in  the  sell- 
ing price.  Therefore,  the  following  method  of  handling  the 
problem  may  be  recommended  as  a  compromise  between  the 
two  theories. 

Wherever  it  is  desirable  to  include  as  a  cost  the  interest 
on  the  capital  invested  in  fixed  assets,  two  special  accounts 
should  be  opened  in  the  ledger :  ( i )  Interest  Reserve  account, 
and  (2)  Interest  Income  account.  The  interest,  calculated 
for  a  current  month,  is  charged  as  a  cost  in  the  same  manner 
as  any  other  cost  item,  while  the  total  interest  so  charged  is 
credited  to  Interest  Reserve  account.  This  account,  of  course, 
should  not  include  or  contain  any  interest  charges  which  are 
actually  paid  for  borrowed  capital. 

At  the  end  of  the  current  month,  the  amount  of  interest, 
charged  as  a  cost  on  the  product  actually  shipped  during  the 
current  month,  should  be  ascertained  and  charged  to  Interest 
Reserve  account,  the  offsetting  credit  being  to  Interest  Income 
account.  Any  interest  items  affecting  manufacturing  costs 
which  have  been  actually  paid  or  received  would  also  be 
charged,  or  credited,  to  Interest  Income  account.  The  balance 
of  Interest  Income  account  would  then  be  credited  to  profit 
and  loss,  while  the  balance  of  Interest  Reserve  account  would 
represent  the  interest  on  goods  in  process  and  finished  stock. 
When  the  monthly  financial  statements  are  prepared,  the  Inter- 
est Reserve  account  is  deducted  from  the  inventory  of  goods  in 
process  and  finished  stock  as  shown  in  the  balance  sheet.  In 
this  way,  interest  is  not  included  as  part  of  an  asset  in  the 
financial  statements,  thus  answering  the  principal  objections  to 
opponents  of  interest  as  a  cost.  At  the  same  time,  the  prin- 
ciple of  charging  interest  as  a  cost  for  the  purpose  of  fixing 
a  fair  selling  price  is  adhered  to. 


APPLICATION  OF  OVERHEAD  141 

5-7.  Power,  Light,  and  Heat 

Whenever  a  factory  operates  a  separate  power  plant,  the 
costs  of  this  department  should  be  compiled  and  ascertained 
separately.  The  total  costs  of  the  power,  light,  and  heat 
furnished  to  departments  are  distributed  upon  the  basis  of 
the  space  occupied,  and  according  to  the  meter  readings  and 
horse-power  hours  of  the  various  machines.  When  it  is  diffi- 
cult to  separate  the  charges  for  light,  heat,  and  power,  the 
items  may  have  to  be  combined.  When  light  and  power  are 
purchased,  readings  and  the  horse-power  of  the  various  ma- 
chines operated  again  furnish  the  necessary  data  for  the  distri- 
bution of  these  charges.  In  this  case  the  heat  is  usually  gen- 
erated within  the  plant  and  its  cost  can  be  ascertained  sepa- 
rately. The  above  items  should  be  apportioned  arbitrarily 
only  when  the  more  accurate  information  furnished  by  horse- 
power measurement  or  meter  readings  cannot  be  obtained. 

8.  Freight  and  Cartage  Inward 

It  is  often  feasible  to  treat  the  item  of  freight  and  cartage 
inward  as  an  element  of  direct  cost,  by  adding  it  to  the  ma- 
terial price,  and  in  that  manner  treating  it  as  a  part  of  ma- 
terial cost.  However,  under  some  manufacturing  conditions, 
this  is  not  practicable.  The  item  must  then  be  treated  as  over- 
head and  applied  to  the  various  departments  according  to  the 
value  of  the  materials  and  supplies  purchased.  Freight  and 
cartage  inward  on  machinery  and  equipment  should,  in  all 
cases,  form  a  part  of  the  cost  of  such  machinery  and  equip- 
ment. 

An  objection  is  often  raised  to  the  addition  of  freight  and 
cartage  inward  to  the  material  cost  as  this  necessitates  chang- 
ing the  unit  price  of  the  material  purchased.  The  price  is  then 
apt  to  be  a  fractional  amount.  Before  the  addition,  the  unit 
price  may  have  been  an  even  amount  of  dollars  and  cents, 
thereby  simplifying  the  figuring  of  material  costs.     After  the 


142 


DETAILED  FACTORY  REPORTS 


addition  much  more  labor  is  involved  in  cost  computation. 
Even  if  it  is  possible  to  add  freight  and  cartage  inward  to 
the  cost  of  direct  material,  it  is  not  always  practicable  to  add 
it  to  the  cost  of  supplies.  Supplies  are  often  received  in  bulk 
and  consist  of  a  number  of  articles.  When  freight  and  cart- 
age is  paid  upon  this  bulk,  it  is  difficult  to  distribute  the  charge 
with  accuracy  over  the  various  items  purchased.  Therefore, 
in  most  cases,  freight  and  cartage  paid  upon  incoming  supplies 
must  be  distributed  over  departments  on  some  arbitrary  basis. 

9.  Over,  Short,  and  Damage  Account 

In  addition  to  the  waste  and  scrap  involved  in  processing 
material,  as  previously  mentioned,  a  shrinkage  or  loss  in  its 
weight  often  occurs  which  cannot  be  accounted  for.  All 
shrinkages  or  losses  which  cannot  be  properly  explained  should 
first  be  charged  to  "Over,  Short,  and  Damage"  account,  and 
then  to  the  department  in  which  the  loss  or  shrinkage  occurs, 
if  this  is  possible.  Failing  this,  they  may  be  apportioned  in 
any  equitable  manner. 

Over,  Short,  and  Damage  account  is  often  used  for  the 
purpose  of  making  credits  for  adjustments  which  are  necessary 
when  material  increases  in  quantity  for  some  unknown  reason, 
although  care  should  be  exercised  to  see  that  these  increases 
do  not  offset  losses.  These  should  be  properly  investigated 
with  a  view  to  their  remedy.  In  other  words,  a  credit  entry 
should  not  be  passed  for  the  express  purpose  of  reducing  the 
debit  side  of  the  Over,  Short,  and  Damage  account.  It  is 
important  to  investigate  separately  all  losses  charged  to  this 
account,  so  that  remedies  may  be  applied  for  correcting  defects 
and  stopping  leaks. 

10.  Miscellaneous  Factory  Expenses 

Some  items  of  expenses,  such  as  system  work,  cost  analysis 
and  investigations,  and  special  expenditures  which  cannot  be 


APPLICATION   OF  OVERHEAD  143 

classified  under  any  of  the  headings  previously  mentioned,  are 
often  listed  as  "Sundries"  in  an  analysis  of  factory  indirect 
charges  and  charged  to  a  "Sundries"  or  "Miscellaneous"  ac- 
count. This  account  should  not  be  used  as  a  dumping 
ground  for  all  unclassified  items.  In  practice,  Sundries  ac- 
count is  often  found  to  contain  important  items  of  overhead 
the  identity  of  which  is  hidden  in  a  number  of  miscellaneous 
charges.  The  Sundries  account  should  permit  of  a  ready 
analysis,  so  that  the  component  parts  may  at  all  times  be  inves- 
tigated and  any  item  wrongly  included  therein  charged  to  its 
proper  account. 

Whenever  it  is  possible,  miscellaneous  factory  expenses 
should  be  charged  to  the  departments  in  which  they  originate, 
if  a  proper  departmental  overhead  rate  is  to  be  established. 
Where  it  is  impracticable  to  charge  these  items  directly  to  de- 
partments, they  must,  of  course,  be  distributed  on  some  arbi- 
trary basis. 


CHAPTER  X 
DEPRECIATION  AND  MAINTENANCE 

Depreciation 

Depreciation  charges  are  applied  to  departments  upon  the 
basis  of  the  total  valuation  of  the  equipment  in  each.  The 
loss  of  value  due  to  depreciation  is  undoubtedly  one  of  the 
most  difficult  of  all  expenses  to  reduce  to  accurate  figures,  be- 
cause of  the  numerous  factors  to  be  taken  into  consideration. 
The  best  method  of  arriving  at  the  rate  for  depreciation  is 
to  estimate  the  life  of  the  asset  in  question  and  then  write  off  a 
certain  per  cent  of  its  value  each  year.  In  fixing  the  rate,  the 
residual  value  of  the  asset  at  the  end  of  the  period  should 
always  be  considered.  In  other  words,  the  total  value  of  the 
article  should  never  be  entirely  written  off,  as  there  always  re- 
mains some  scrap  or  sales  value. 

Effect  of  Repairs  and  Renewals  on  Depreciation 

One  factor  of  depreciation  needs  to  be  noted  in  particular; 
this  is  the  amount  spent  for  maintenance  in  the  form  of  repairs 
and  renewals.  It  is  clear  that  whatever  is  spent  to  counteract 
the  effect  of  age  and  use  tends  to  lessen  the  amount  of  deprecia- 
tion. Theoretically,  if  a  factory  were  maintained  in  its  orig- 
inal condition,  its  maintenance  cost  would  exactly  counterbal- 
ance the  depreciation.  However,  this  is  quite  impossible  in 
practical  operation.  Repairs  are  made  only  as  efficiency  re- 
quires. The  plant  as  a  whole  may  be  gradually  depreciating 
without  its  efficiency  being  impaired  to  any  appreciable  extent. 
In  some  cases  the  renewal  of  parts  may  increase  the  value  of 
a  machine  to  a  point  beyond  its  original  cost,  as  where  ordinary 
cast-iron  parts   are   replaced  by   steel.     This   extra   expense 

144 


DEPRECIATION  AND  MAINTENANCE  145 

should  not  be  considered  as  an  offset  to  depreciation,  but  as  an 
additional  investment  of  capital.  Just  where  the  line  between 
the  two  is  to  be  drawn  must  be  determined  by  the  circumstances 
of  the  case. 

Factors  to  be  Considered  in  Fixing  Rates 

The  rate  of  depreciation  depends  upon  many  different  and 
variable  factors,  some  of  the  most  important  of  which  are : 
I.  Nature  and  construction  of  buildings  and  equipment, 
together  with  their  condition. 
•  2.  Deterioration  of  plant  in  general  and  of  machinery  in 
particular,  due  to  wear  and  tear. 

3.  Amount  spent  for  maintenance  in  the  way  of  repairs 

and  renewals. 

4.  The  invention   of  new  methods  or  new  machines 

which  may  or  may  not  entirely  replace  the  old 
ones. 

5.  Permanency  of  business,  and  likelihood  of  increase  or 

decrease  in  the  same. 

6.  Amounts  previously  written  off  for  depreciation. 

7.  Obsolescence. 

There  are  many  additional  factors,  such  as  amortization, 
peculiar  and  excessive  uses  of  machines,  rate  of  production, 
idleness  of  plant,  etc.,  all  of  which  enter  into  the  problem. 

Schedule  of  Depreciation  Rates 

The  following  schedule  of  depreciation  rates  represents 
a  classification  used  by  one  of  the  largest  manufacturing  con- 
cerns in  the  country.  The  majority  of  the  rates  have  been 
determined  at  various  conferences  held  to  consider  the  ques- 
tion. They  are  endorsed  by  the  writer  as  they  are  the  results 
of  long  and  careful  study  of  this  subject.  The  rates  apply  to 
a  period  of  one  year. 


146  DETAILED  FACTORY  REPORTS 

Approved 
Rates 
Land  : 

Dams  and  waterways i^/^% 

Roadways  and  sidewalks 4 

Paving   and   pavements 4-10 

Wells — gas    10 

Wells — water   3 

Buildings  : 
Housing: 

Dwellings — frame   3 

Tenement  houses 5 

Hotels    5 

Fire-proof : 

Concrete    2 

Brick    21/2 

Brick  and  concrete  floors 2^/2 

Main  buildings — brick  and  concrete 2-2^/2 

Steel    frame — non-combustible   roof,    and   corrugated 

iron  walls   3 

Steel  with  corrugated  sheet  iron  or  steel  plate 5 

Corrugated  iron — steel  frame  concrete  floor 3 

Reinforced  concrete,  or  steel  and  tile 2 

Stone,  brick,  concrete  with  or  without  steel,  first-class 

stone  and  brick 2 

Mill  or  slow-burning  buildings — brick,  steel,  and  wood, 

or  brick  and  wood 3 

Non-fire-proof : 

Outbuildings    7V2 

Wood  5 

Substantial  wooden  buildings 5 

All-wood  structures — well  built 5 

All-wood  structures — cheap  material 7^2 

Steel  frame — wooden  roof,  and  corrugated  iron  walls  5 

Steel  or  corrugated  sheet  iron  with  wood 5 

Corrugated  iron — wood  frame  and  floor 5 

Corrugated  iron — wood  frame,  concrete  floor 5 

Corrugated  iron — steel  frame,  wood  floor 5 

Concrete  block  with  wooden  roofs  and  floors 5 

Miscellaneous  structures : 

Hose  reel  and  guard  houses 15 

Pine  swamp  (magazines)   2 

Frames,  stables,  and  sheds 5 

Bins — concrete  and  brick   5 

Bins — wood  alone  20 


DEPRECIATION  AND  MAINTENANCE 


147 


Trestles — steel  (not  including  rails  or  ties) 3  1/3% 

'  Trestles — wood  (not  including  rails  or  ties) 6 2/3 

Docks,  piers,  and  wharves  3  1/3 

Dry  docks — basin    2 

Dry  docks — floating   5 

Ship  sheds    3  1/3 

Fences — wooden    10 

Fences — wooden  and  wire  mesh 8  1/3 

Pump    5 

Retaining  walls   2-5 

Tunnels,  underground  piping,  vaults,  and  general  conduits.  5 

Stack — brick  3 

Building  Mechanical  Equipments: 
Plumbing : 

Inside  piping,  and  water  and  sewer  piping 6 

Heating  and  ventilation 5 

Sprinklers    5 

Electric  light  and  power  wiring: 

Departmental   wiring — net  additions 6 

Inside  wiring  5 

Elevators 5-7Mj 

Fire  alarm  and  fire  prevention  apparatus 5 

Refrigeration    714 

Plant  Power  and  Large  Equipment: 

Power  machinery   6 

Steam  plant  equipment : 

Steam  power  plant,  including  boilers  and  piping 6 

Boilers   5 

Boilers — including    boiler    house    equipment    such    as 
economizers,    feed   water   heaters,    injectors,   damper 

regulators,  etc.  (does  not  include  feed  water  pumps) . .  5V2  • 

Water  purifying  plant  5V^ 

Engines    5 

Steam  turbines 5 

Condensers    6 

Piping    yVz 

Superheaters    5 

Stokers — fixed  parts 5 

Stokers — moving  parts    20 

Electric  plant  equipment 6 

Dynamos   5 

Electric  machinery — generators    5 

Electric  machinery — motors    5V2 

Electric  motors  and  apparatus   lO 

Storage  batteries 6 


148  DETAILED  FACTORY  REPORTS 

Sub-station    equipment    5  % 

Switchboards — telephone  central    5 

Switchboards — ^telephone  P.    B.    X 7!/^ 

Switchboards  and  wiring  5 

Switchboards,  main  wiring,  and  conduit 5 

Aerial   lines    5 

Cables — underground   (high  tension)    5 

Electric  wiring   5 

Conduits    2 

Conduits,  manholes,  and  paving 5 

Transformers — station   service    5 

Gas  and  oil  plant  equipment: 

Engines — gas  and  oil 71^ 

Fuel   oil   system    71/2 

Oil   lines    5 

Steel  gas-producers,  piping,  etc. — including  gas  washers, 
gas   scrubbers,   gasometers,   dust   catchers,    and   dust 

collectors    6  2/3 

Brick  gas-producers  6  2/3 

Gas  supply  system   6  2/3 

Gas  plant  equipment   6  2/3 

Pneumatic  plant  equipment 6 

Compressed   air   system    "jy^ 

Air  compressors 5 

Hydraulic  plant  equipment 6 

Water  lines    5 

Pumps    7I/2 

Miscellaneous  steel  mill,  forging  and  machine  shop  equip- 
ment: 
Steel  work — including  air,  oil,  and  water  tanks,  stand 
pipes ;  gas,  hot,  and  cold,  blast  furnaces  and  bessemer 
plant;  scrap  drops,  crane  runways  (when  not  included 
as  part  of  buildings),  bins,  racks,  poles,  foot  bridges, 
steel  stack,  wire  screening,  drop  balls,  coke,  and  ore 
pockets ;  heating  pockets,  cribs,  skip  hoists,  ladle  rests, 

smoke  boxes,  etc. ;  plate  carriers,  etc 4 

Stack — steel    8 

Dolomite  and  lime  kilns,  rotary  nodulizing  kilns 6  2/3 

Steel  ladles,  charging  boxes,  charging  barrows,  etc 20 

Cranes — wooden    6  2/3 

Cranes — electric,  hydraulic,  steam,  and  hand  power;  jib 
and  davit ;  hand  hoists,  electric  hoists,  derricks,  lifting 

magnets,  and  charging  machines 6  2/^ 

Cars — molds,  cinder  and  hot  metal  ladle,  cars  charging 
buggies,  transfer  cars,  ore  cars,  scale  cars,  jack  cars, 
skip  cars,  shop  and  ash  cars,  core  oven  cars 10 


DEPRECIATION  AND  MAINTENANCE 


149 


Cars — standard  gage  and  narrow  gage  used  by  trans- 
portation department  10  % 

Car  transfers,  turntables,  car  dumpers,  car  shifters,  pig- 
casting  machines,  water  sprays,  grab  buckets,  cap- 
stans,   windlasses,    winches,    shear    poles,    snubbing 

devices,  drag-outs,  etc 8  1/3 

Blast  furnace  stacks,  stoves,  soaking  pits,  open  hearth, 
furnaces,  crucible  melting  furnaces,  hot  metal  mixers, 
converter  vessels,   cupolas,   open   hearth  pre-heaters, 

cinder  runner,  slag  spouts,  etc 5 

Cupolas,  converters,  melting  furnaces,  and  accessories. .       5 
Annealing  and  heating  furnaces,  ovens,  forges,  etc.  ...       5 

Furnaces    6 

Heating  and  melting  furnaces   6 

Puddle  furnaces,  electric,  air,  oil,  and  welding  furnaces, 

cooler  ovens,  drying  ovens,  etc S"^^ 

Mill  machinery — including  roll  trains,  tables,  shears,  and 
intensifiers,  cold  saws,  hotbeds,  cooling  beds,  straight- 
ening machines,  drag-ons,  drag-offs,  pushers,  ingot 
buggies,  hydraulic  accumulators,  cold  drawn  ma- 
chinery such  as  draw  benches,  roll  straightening  ma- 
chines, etc.,  hot  saws sVz 

Exhaust    system    7^^ 

Exhaust  blower  system   7^/4 

Tanks  and  reservoirs — steel    4V^ 

Tanks  and  reservoirs — wood 8 

Machinery: 
Machine  tools: 

Lathes,  slotters,  planers,  drilling  and  boring  machines; 
milling  machines,  tool  and  surface  grinders;  emery 
wheels,  keyway  cutters,  tapping  machines,  arbor 
presses,  centering  machines,  squaring  machines,  hack 
saws,  notching  machines,  buffing  machines,  test  pumps, 
pointing  machines,  metal  band  saws,  belt  lacers,  saw 
grinders,  etc.,  die-sinking  machines,  trimming  presses, 
etc.,  belt  cutters,  pipe  threading  machines,  car  wheel 
presses,  saw-setting  and  filing  machines,  angle-bench- 
ing machines,  cold  saw-cutting  off  machines,  etc 6  2/3 

Gun  and  tool  machinery  6 

Cartridge  machinery    8 

Tool  and  shop  machinery 5 

Punches,  shears,  hydraulic  and  pneumatic  riveters;  bend- 
ing rolls,  straightening  rolls,  straightening  presses,  bull- 
dozers, joggling  machines,  flanging  machines,  frame-set- 
ting machines,  beveling  machines,  keel-bending  ma- 
chines, can  brakes,  etc.,  forging  and  upsetting  machines  6  2/3 
Punch  presses,  bending  rolls,  power  shears,  and  drop  ham- 
mers           6  2/3 


150         DETAILED  FACTORY  REPORTS 

Hydraulic  forging  presses,  bending  presses,  and  fluid  com- 
pressers    6  2/3% 

Hammers — steam,  drop,  or  helve 10 

Shafting,  pulleys,  hangers,  and  belting 5 

Belting   7 

Wood-working  machinery — including  band,  jig,  and  rip 
saws,  dovetailing  machines,  moulding  machines,  ten- 
oners,  mortisers,  sizers,  wood-boring  machines,  wood 
shapers,  wood  lathes,  wood  planers,  universal  wood 
workers,  carvers  and  moulders,  sanding  machines,  sur- 
facers,  swing  saws,  scroll  saws,  jointers  and  wood  cut- 
off saws,  embossing  press,  core  box,  disc  grinders 5 

Miscellaneous  machinery : 
Locomotive  cranes,  steam  and  electric,  steam  shovels. .     10 

Coal  and  ash  handling  machinery 8 

Hydraulic  jacks    10 

Conveyors — coal,  ash,  and  sand,  screw  conveyors 6 

Skip  and  stock  hoists 6 

Grinding  and  mixing  machines;  crushers,  pulverizers, 
squeezers,  scrap  shears,  concrete  mixers,  mud  guns, 
jarring  machines,  tumbling  barrels,  water  cinder 
mills,  sand  blast  machinery,  moulding  machines,  core- 
ramming  machines,  roller  feeders,  etc.,  testing  ma- 
chines, vibrating  machines,  tie  rod  machines,  welding 
machines,  etc.,  magnetic  separators,  venturimeters,  oil 
meters,  fans,  gages,  blowers,  shaving  exhaust  system, 
acetylene  generators,  oil-testing  machines,  sand 
dryers,  oiling  systems,  sewing  machines,  locking  ma- 
chines, crimping  machines,  classifiers,  thickeners,  ball 
mills,  roller  feeders,  revolving  screens,  flotation  ma- 
chines,   belt-strapping   machines,    mechanical    mixing 

machines,   etc 10 

Pickling  washing  machines,  electric  and  acetylene  weld- 
ing machines   10 

Small  Tools  : 
All  small  tools  of  an  asset  nature 10 

Miscellaneous  Equipment  : 
Miscellaneous  shop  equipment: 

Anvils,  forges,  bending  blocks,  surface  plates,  mandrels, 
porter  bars,  extractors,  track  and  wagon  scales,  crane 
scales,  portable  scales,  oil  and  powder  cans,  oil  filters, 
glue  pots,  barrels,  microscopes,  pyrometers,  calori- 
meters, storage  batteries,  air  hose 10 

Pickling  tanks,  etc •     20 

Testing  apparatus  10 

Testing  instruments   (electric)    10 

Fixed  kettles  and  scales 10 


DEPRECIATION  AND  MAINTENANCE 


151 


Office  and  shop  furniture  and  fixtures — including  store  and 
tool  room  fixtures : 

Factory  equipment    10  % 

Furniture  and  fixtures 10 

Partitions    7I/2 

Watchman's  system    "jy^ 

Benches,  partitions — permanent 71/2 

Benches    8 

Trucks  and  movable  racks    714 

Miscellaneous  equipment — including  desks,  chairs,  type- 
writers, adding  and  calculating  machines,  blue-print- 
ing machines,  filing  cabinets  and  trucks,  shelving  par- 
titions, time  clocks,  time  detector  systems,  telephone, 

flexotypes,  graphotypes,  etc 10 

Typewriters  and  adding  machines 20 

Telephone  equipment   7^/^ 

Transportation — local : 

Locomotives — steam  and  electric   6  2/3 

Motor    trucks,    automobiles,    stable    equipment,    motor 

boats,    etc 25 

Horses  and  wagons   12 

Laboratory  and  scientific  apparatus    10 

Restaurant  equipment    10 

Surgical  instruments    10 

Yard  equipment — industrial  or  shop 7V2 

Floating  equipment    10 

Patterns — standard : 

Metal,  net  additions  75 

Wood,  net  additions    100 


Basis  of  Standard  Rates 

The  foregoing  schedules  are  intended  as  a  guide  in  de- 
termining rates  of  depreciation.  All  the  rates  are  based  on: 
(i)  the  cost  of  equipment,  (2)  the  life  of  the  equipment,  and 
(3)  on  a  ten-hour  day;  taking  into  consideration  that  there  will 
be  a  residual  value  after  the  life.  If  it  is  desired  to  obtain 
a  rate  of  depreciation  covering  the  whole  plant,  the  rate  of  6J0 
may  be  considered  equitable ;  or  the  plant  may  be  split  up  into 
two  sections,  viz.,  (i)  buildings  and  (2)  plant,  consisting  of 
machinery  and  equipment.  In  such  a  case  the  rates  recom- 
mended would  be  3%  on  all  buildings,  and  7^  on  machinery 
and  equipment. 


152 


DETAILED  FACTORY  REPORTS 


Group  Rates 

If  it  is  desired  to  adopt  rates  covering  certain  groups  of 
plant  and  equipment,  the  following  schedule  is  suggested,  each 
group  rate  to  be  applied  to  the  investments  in  that  group : 


Group  Depreciation  Rates 


Rates 


■   3% 


Buildings  : 

Reinforced  concrete  or  steel  tile  

Brick  and  steel — non-combustible  roof  and  concrete  floors 

Brick,  steel,  and  wood , 

Brick  and  wood  , 

Steel  frame — wooden  roof  and  corrugated  iron  walls. . 
Steel    frame — non-combustible   roof    and   corrugated   iron 

walls    

All-wood  structures — well  built  (20  years) 

All-wood  structures — cheap    (20    years) 

Miscellaneous  structures    Special 

Miscellaneous  real  estate  improvements " 

Mechanical  Equipment  of  Buildings: 

Sprinkler  system   

Heating  and  ventilating  system   

Water  and  sewer  piping,  and  sanitary  fixtures 

Electric  light  and  power  wiring 

Elevators    

Fire  alarm  and  fire  prevention  apparatus 

Refrigeration   system    


6  2/3% 


Plant  Power  and  Large  Equipments: 

Boilers,  pumps,  and  feed-water  heaters,  air  compressors. 

Power  piping  (steam,  water,  air,  gas,  and  oil) 

Switchboards,  main  wiring,  and  conduits 

Turbines,  engines,  generators,  dynamos,  transformers... 
Cupolas,  converters,  melting  furnaces,  and  accessories.  .. 
Annealing  and  heating  furnaces,  ovens,  forges,  etc 


6% 


Machinery — Exclusive  of  Hammers: 

Machinery,  motors,  machine  tools,  traveling  cranes,  etc. 

Punch  presses,  bending  rolls,  power  shears 

Wood-working  machinery   

Miscellaneous  machinery  

Shafting,  pulleys,  hangers,  and  belting  

Drop  and  helve  hammers 


Small  Asset  Tools: 
Machine-tool  accessories — boring  bars,  driver's  keyseating 

broaches,  etc.  (all  renewals  to  repairs) 

For  machines    

Hand  tools    


6% 
10% 

10% 


DEPRECIATION  AND  MAINTENANCE  153 

Special 


Punches  and  dies  

Chills,  proving  ground  equipment 

Gages    

Chucks    

Jigs  and  fixtures   


Rates  for  Special  Machinery 

In  arranging  the  foregoing  schedule,  many  items  of  spe- 
cial machinery  are  left  out  of  the  classification  for  two  reasons : 
First,  before  placing  a  rate  on  special  machinery,  the  nature 
of  its  operation  has  to  be  carefully  considered;  it  might,  for 
instance,  be  used  only  on  certain  work.  Secondly,  obso- 
lescence may  be  a  large  factor  in  determining  the  rate  of  a  par- 
ticular machine.  In  some  cases  it  may  be  necessary  to  amortize 
special  machinery  when  it  is  of  little  more  than  scrap  value 
after  a  particular  piece  of  work  is  finished. 

Method  of  Charging  off  Depreciation 

Attention  must  here  be  directed  to  the  importance  of 
charging  off  depreciation  on  conservative  and  correct  lines. 
Some  manufacturers  make  a  practice  of  charging  off  the  entire 
plant  as  rapidly  as  possible,  while  others,  in  a  few  years,  write 
off  their  books  from  50%  to  75%  of  the  value  of  their  plant 
assets.  Again,  in  some  instances,  the  amount  of  depreciation 
written  off  depends  upon  the  amount  of  profit  earned  for  the 
current  year.  When  a  large  profit  is  made,  a  fair  depreciation 
is  written  off;  whereas,  if  the  profit  is  small,  none  whatever  is 
considered. 

When  the  amount  of  depreciation  has  been  credited  to  a 
reserve  account  and  not  written  off  the  cost  of  the  plant  assets, 
the  only  change  necessary  will  be  to  adjust  the  amounts  of 
depreciation  from  the  time  of  the  purchase  of  the  property 
according  to  the  new  rates  to  be  used,  and  then  use  the  proper 
rates  for  the  ensuing  periods.  On  the  other  hand,  if  deprecia- 
tion has  already  been  written  off  the  asset  accounts,  adjust- 


154  DETAILED  FACTORY  REPORTS 

ments  should  be  made  to  restore  these  accounts  to  their  orig- 
inal cost  value,  and  a  depreciation  reserve  account  created. 

Difference  Between  Amortization  and  Depreciation 

There  is  a  clear  distinction  between  depreciation  and 
amortization.  Depreciation  represents  the  wasting  of  an  asset 
due  to  wear  and  tear  and  other  factors,  as  mentioned  in  the 
beginning  of  this  chapter.  Amortization  implies  that  the  value 
of  an  asset  disappears  in  a  given  period  of  time,  not  through 
wear  and  tear,  but  through  obsolescence.  Obsolescence  may 
be  brought  about  in  various  ways.  The  asset — whether  ma- 
chinery, equipment,  or  buildings — may  become  obsolete 
through  the  progress  of  invention;  or  the  value  of  the  asset 
may  disappear  through  the  ownership  being  vested  in  other 
hands  after  a  certain  period  of  time;  or  the  work  for  which 
a  special  type  of  building  or  a  particular  kind  of  machinery 
is  used  may  cease  entirely.  Then,  if  there  is  no  market  for 
such  machinery  or  buildings,  the  assets  in  question  will  only 
be  worth  their  scrap  value. 

Legal  Definition  of  Depreciation  and  Amortization 

A  decision  of  the  Treasury  Department  in  the  Munitions 
Tax  Law  of  September  8,  191 6,  Regulation  No.  39,  issued 
October  24,  19 16,  as  Treasury  Decision  2384  on  Internal  Reve- 
nue, clearly  interprets  the  difference  between  depreciation  and 
amortization.  As  the  decision  is  frequently  quoted,  and  as  it 
is  the  only  published  legal  decision  at  present  on  the  distinc- 
tion between  the  two,  it  is  herewith  reproduced : 

Art.  XX.  The  deduction  authorized  on  account  of 
depreciation  relates  to  the  loss  due  to  use,  wear  and  tear  of 
physical  property,  owned  and  used  by  a  manufacturer,  but 
which  is  not  specially  designed  or  installed  for  the  purpose 
of  manufacturing  munitions  or  parts  thereof,  and  which, 
without  material  alteration  and  change,  may  be  used  in  con- 
nection with  any  other  business  in  which  the  person  is  or 
may  be   hereafter  engaged. 


DEPRECIATION  AND  MAINTENANCE 

The  annual  deduction  on  this  account  will  be  a  reason- 
able allowance  determined  upon  the  basis  of  the  cost  and 
probable  number  of  years  constituting  the  life  of  the  prop- 
erty. 

If  the  same  building  and  machinery  or  other  equipment 
are  used  coincidently  for  purposes  other  than  the  manufac- 
ture of  munitions  or  parts  thereof,  then  the  amount  de- 
ductible from  the  gross  income  returned  for  the  purpose  of 
this  Title  on  account  of  depreciation  will  be  apportioned 
in  accordance  with  the  rule  hereinbefore  set  out  for  appor- 
tioning running  expenses,  and  the  deduction  from  the  gross 
income  contemplated  by  this  Title  will  be  made  accord- 
ingly. 

Art.  XXI.  Section  302  of  this  Title  authorizes  a  de- 
duction to  meet  the  conditions  peculiar  to  each  concern, 
and  has  for  its  purpose  the  amortization  of  the  values  of 
buildings  and  machinery  constituting  special  plants,  which 
will,  except  for  salvage,  have  no  substantial  value  to  the 
manufacturer  when  the  contracts  executed  or  to  be  executed 
for  the  manufacturer  of  munitions  or  parts  thereof,  have 
been  fully  performed. 

The  deduction  authorized  on  this  account  relates  to 
property  (buildings,  machinery  and  equipment)  especially 
constructed  or  installed  for  use  in  the  manufacture  of  muni- 
tions or  parts  thereof,  and  which,  when  no  longer  useful  for 
this  purpose,  cannot,  without  material  alteration  or  change, 
if  at  all,  be  used  for  any  other  purpose,  the  life  of  which 
property  is  substantially  coincident  with  the  life  of  the 
contracts. 

The  annual  allowance  to  be  deducted  on  this  account 
will  be  determined  by  estimating  the  probable  number  of 
years  the  property  will  be  used  in  the  manufacture  of  muni- 
tions or  parts,  and  by  dividing  the  cost  of  such  property, 
less  estimated  salvage,  by  such  probable  number  of  years. 
The  quotient  thus  obtained  will  measure  the  amount  to  be 
deducted  each  year  on  account  of  amortization,  until  the 
cost  of  the  property  has  been  extinguished.  Or  the  cost  of 
the  property  may  be  amortized  on  the  basis  of  the  quantity 
of  munitions  or  parts  thereof  manufactured  under  contracts 
in  connection  with  the  fulfilment  of  which  the  buildings  and 
machinery  or  equipment  were  specially  constructed  or  in- 
stalled. 

Neither  the  depreciation  nor  the  amortization  deduc- 
tion allowable  in  the  return  made  for  the  purpose  of  this 
Title  will  relate  to  property  used  in  connection  with  any 
other  business  carried  on  by  the  manufacturer.  Amortiza- 
tion applies  only  and  particularly  to  those  special  plants 
and  equipment  whose  life  and  value,  except  salvage,  will 
terminate  with  the  end  of  the  business  for  which  they  were 


.155 


156  DETAILED  FACTORY  REPORTS 

erected  and  equipped.  It  is  to  be  differentiated  from 
depreciation  in  that  depreciation  relates  to  property  whose 
life  and  value  is  not  dependent  upon  or  materially  affected 
by  its  use  in  the  manufacture  of  munitions  or  parts  thereof. 

The  Effect  of  Overtime  on  Depreciation 

The  following  is  a  copy  of  a  letter  sent  to  the  author  by 
the  auditor  of  one  of  America's  largest  steel  companies  on 
the  question  of  abnormal  depreciation  caused  by  working  over- 
time. The  letter  in  question  covers  the  problems  raised  by 
working  overtime  under  war  conditions  and  on  war  contracts, 
but  as  the  writer  clearly  states  the  proposition  as  a  whole,  and 
the  points  raised  therein  are  important,  the  letter  is  here  re- 
produced in  full: 

I.  In  arriving  at  rates  for  overtime  depreciation,  due 
consideration  should  be  given  to  the  following  conditions, 
the  effect  of  which  should  be  properly  reflected  in  any  rates 
established : 

(a)  Any  time  over  the  normal  should  be  subject  to 

overtime  deprecation. 

(b)  Present    conditions    demand    that    production    be 

considered  paramount.  The  machine  receives 
secondary  consideration.  In  fact  it  is  forgotten 
and  is  usually  "driven  to  death." 

(c)  The  constant  usage  of  a  machine  affords  no  oppor- 

tunity for  proper  repairs  and  supervision  of  its 
condition  and  maintenance,  all  of  which  obvi- 
ously shortens  its  life. 

(d)  When  there  is  more  than  one  shift  the  responsi- 

bility for  the  up-keep  is  divided,  as  each  man, 
especially  if  on  piece-work,  will  always  leave 
it  to  the  following  man  to  "fix  things  up,"  with 
the  result  that  the  machine  is  bound  to  suffer. 

(e)  Extra  shifts  necessitate  having  at   least  two,   in 

many  cases  three  men,  working  on  the  same  ma- 
chine in  the  course  of  24  hours.  Inasmuch  as 
no  two  men  will  run  a  machine  in  the  same  man- 
ner the  effect  must  be  detrimental. 

(f)  Working  over  eight  hours  will  necessitate  night 

work.  The  reduced  efficiency  of  a  man  on  night 
work  has  been  recognized  and  is  bound  to  be 
reflected  in  the  usage  of  the  machine. 

(g)  Additional  shifts  require  a  larger  supply  of  men, 

and  accordingly  dilute  skilled  labor  so  that  it 


DEPRECIATION  AND  MAINTENANCE 


157 


becomes  necessary  to  take  on  green  men — 
which  fact  does  not  presage  any  good  for  the 
machine. 
(h)  When  driving  a  machine  incessantly  it  has  no 
chance  to  rest.  It  is  scientifically  conceded  that 
metal  is  subject  to  fatigue  and  its  life  is  length- 
ened by  an  occasional  rest. 

2.  We  feel  that  the  rates  established  for  normal  depre- 
ciation should  be  on  the  basis  of  an  eight-hour  day.  Any 
department  working  in  excess  of  eight  hours  should  be  sub- 
ject to  overtime  depreciation.  Inasmuch  as  all  plants  en- 
gaged on  Government  work  consider  that  a  straight  day's 
work  or  shift  is  eight  hours,  we  think  it  would  be  a  mis- 
take as  well  as  cause  considerable  confusion  to  make  any 
further  distinction. 

3.  (a)  The  following  is  a  table  of  rates  which  we  think 
would  fairly  reflect  the  proper  allowances  for  abnormal 
depreciation : 

8  hours — normal  depreciation 

—     5%  of  normal  depreciation,  additional 


9      ' 

'    -    5% 

10 

'    —  10% 

II 

'    —  15% 

12      * 

'    —  20% 

13      ' 

'    -25% 

14      ' 

'    —  30% 

15      ' 

'    —  40% 

16      ' 

'    —  50% 

17      ' 

'    —  60% 

18      ' 

'    —  70% 

19      ' 

'    —  80% 

20      ' 

'    —  90% 

21      ' 

'    —100% 

22      ' 

'    —115% 

23      ' 

'    —130% 

24      ' 

'    —150% 

(b)  We  feel  that  in  fairness  to  all,  after  a  normal  rate 
of  depreciation  has  been  established,  the  allowance  for  over- 
time depreciation  should  exclude  the  element  of  obsolescence. 
This  would  mean  that  the  allowance  for  overtime  deprecia- 
tion up  to  a  certain  point  would  not  increase  in  the  same 
ratio  as  the  number  of  hours.  In  other  words,  we  consider 
that  the  factor  of  obsolescence  would  be  constant,  and  the 
only  varying  element  would  be  the  actual  depreciation  due 
to  wear  and  tear.  The  "certain  point"  referred  to  above 
should  be  sixteen  hours.  After  this  point,  we  consider 
depreciation  takes  place  very  rapidly  and  we  feel  that  in  the 
above  table  the  conditions  are  truly  presented. 

4.  We  think,  furthermore,  that  it  would  be  an  injustice 


1^8  DETAILED  FACTORY  REPORTS 

not  to  consider  that  the  auxiliary  departments  of  a  plant 
should  be  subject  to  overtime  depreciation.  By  this  is  meant 
such  departments  as  steam,  power,  water,  transportation,  etc. 
Obviously  a  "speed-up"  program  is  felt  in  every  department 
in  the  plant.  It  is  conceded  that  these  departments  do 
ordinarily  work  24  hours  a  day,  but  it  is  only  in  a  measure. 
Under  normal  conditions  they  are  working  at  full  capacity 
only  a  fractional  part  of  a  day,  and  it  was  on  this  basis  that 
normal  depreciation  was  figured.  If,  however,  it  is  required 
that  these  plants  be  run  at  full  capacity  for  a  greater  than 
their  normal  time,  it  cannot  be  denied  that  there  is  addi- 
tional depreciation. 

5.  We  feel  that  the  application  of  overtime  deprecia- 
tion will  necessitate  the  determination  of  normal  deprecia- 
tion for  each  department  in  the  plant.  Furthermore,  the 
determination  of  the  number  of  hours  a  department  is  work- 
ing overtime,  unless  treated  in  a  broad  way,  might  resolve 
itself  into  a  complicated  problem.  Not  knowing  the  attitude 
that  will  be  taken  in  this  respect,  we  hesitate  in  offering  any 
suggestions. 

6.  We  trust  that  if  not  considered  out  of  order,  you  will 
forward  this  statement  of  our  views  to  the  War  Appraisals 
Board.  This  question  is  of  much  importance  to  us  and  we 
are  accordingly  deeply  interested.  We  would  be  glad  to 
furnish  the  Board  with  any  information  that  it  might  require 
and  would  be  very  glad  to  work  with  it  further,  giving  it  any 
possible  benefit  resulting  from  our  detail  study  and  experi- 
ence. 


Limit  of  Maximum  Percentage  for  Overtime 

There  is  one  exception  that  the  author  would  like  to  make 
in  connection  with  the  schedule  presented  on  page  157.  Be- 
fore outlining  this  exception,  a  quotation  bearing  on  the  same 
subject  is  taken  from  a  memorandum  of  Captain  J.  P.  Carlin, 
Washington,  D.  C,  who  has  made  a  very  exhaustive  study  of 
the  subject  of  depreciation  and  the  effect  of  overtime.  The 
memorandum  in  part  reads  as  follows : 

1.  It  is  assumed  that  every  manufacturer  will  have  a 

machine   reserve  supply  to  prevent  unnecessary 
destruction  of   plant. 

2.  If  a  reserve  supply  is  maintained,  proper  relaxation 

will    be    given    the    machinery    and    opportunity 
afforded  for  proper  repairs  and  maintenance. 


DEPRECIATION  AND  MAINTENANCE 


159 


3.  Proper  supervision  will  result  in  the  machinery  re- 

pair and  maintenance  group,  maintaining  each 
unit  of  the  plant  in  proper  shape,  irrespective  of 
shifts. 

4.  Normal  rates  of  depreciation  are  considered  on  the 

basis  of  normal  labor  conditions  and  the  average 
workman  is  this  basis. 

5.  Night    work    results    in    decreased    efficiency,    but 

should  show  no  appreciable  reflection  in  the  usage 
of  the  machines,  especially  where  maintenance  is 
kept  up  by  day  repair  crews. 

6.  Where  skilled  labor  is  diluted  with  unskilled  labor, 

it  is  considered  that  depreciation  resulting  from 
wear  and  tear  will  be  increased;  but  this  will  be 
absorbed  in  maintenance  charges,  which  are 
allowed  as  all  element  of  cost  in  cost-plus  con- 
tracts in  addition  to  depreciation. 

The  only  variable  in  overtime  use  or  diluted  labor  is 
wear  and  tear.  Natural  decay  and  obsolescence,  however, 
were  also  considered  in  determining  the  normal  rates  of 
depreciation.  Both  deterioration  and  obsolescence  are  con- 
stant and  proper  maintenance  should  absorb  a  part  of  the 
wear  and  tear. 

Theoretically,  however,  it  is  evident  that  if  age  de- 
terioration and  obsolescence,  two  of  the  three  elements  of 
depreciation,  are  constant,  and  if  the  third  physical  deteri- 
oration due  to  wear  and  tear  is  partially  made  good  by  main- 
tenance .  .  .  the  total  allowance  for  overtime  or  other 
causes  should  not  exceed  100%  additional  of  the  normal  rate. 

The  author  has  also  come  to  the  conclusion,  after  careful 
consideration,  that  the  rate  at  no  time  should  exceed  an  addi- 
tional 100%  of  the  normal  rate.  With  normal  rates  calcu- 
lated on  a  ten-hour  basis,  it  is  recommended  that  the  additional 
percentages  as  outlined  in  schedule  of  depreciation  rates  to 
cover  the  additional  hours,  should  be  as  follows: 


II  hrs. — add    5%  of  the  normal  rate 


12 

— 

ID 

13 

—  " 

15 

14 

—  " 

20 

15 

—  " 

25 

16 

—  " 

30 

17 

—  " 

35 

18 

—  " 

40 

l6o  DETAILED  FACTORY  REPORTS 

19  hrs. — add  45%  of  the  normal  rate 


20    "  —  ' 

50 

21      "  —  ' 

hlVi 

22      "  —  ' 

671/2 

23      "  —  ' 

80 

24     "  —  ' 

95 

In  discussing  the  additional  percentages  for  overtime,  the 
fact  must  also  be  taken  into  consideration  that  proper  main- 
tenance and  repairs  are  essential  for  machine  operation ;  other- 
wise machinery  would  break  down  and  production  would  be 
interfered  with.  No  manufacturer  would  consider  for  a  mo- 
ment running  his  machinery  continuously  without  repairing 
or  adjusting  it.  In  other  words,  if  no  time  is  provided  for 
repairs  and  maintenance,  the  machine  has  to  be  laid  aside  and 
another  substituted.  Depreciation  would  then  cease  at  that 
point,  excepting  for  the  small  rate  of  an  idle  machine.  Another 
fact  which  should  be  considered  is  that  repairs  and  mainten- 
ance are  chargeable  as  costs,  and,  if  not  made  during  the 
current  period,  must  be  made  later.  This  cost  would  offset 
any  higher  percentages  to  add  to  the  normal  depreciation  rate. 

Abnormal  Depreciation  and  Amortization 

Wherever  plant  and  facilities  have  been  acquired  specifi- 
cally for  certain  contracts  and  depreciate  in  value  owing  to 
the  market  conditions,  an  allowance  should  be  made  for  the 
difference  between  the  actual  cost  and  the  market  value,  pro- 
viding the  market  value  is  much  lower  than  the  cost.  This 
difference  or  loss  in  invested  capital  should  be  borne  by  the 
contracts. 

Another  problem  sometimes  arises  which  must  be  taken 
care  of  by  amortization.  This  occurs  where  the  contractor 
has  purchased  special  machinery  and  equipment  to  be  used 
exclusively  on  certain  contracts,  and  where  the  value  of  this 
machinery  and  equipment  may  be  worth  little  more  than  scrap 
value  at  the  end  of  the  contract  owing  to  the  fact  that  they 


DEPRECIATION  AND  MAINTENANCE  i6i 

cannot  be  used  for  any  other  purpose.  Wherever  a  condition 
of  this  kind  exists,  the  following  information  should  be  ob- 
tained and  used  as  a  basis  for  determining  the  method  of 
amortization : 

1.  Cost  of  the  equipment. 

2.  Can  the  equipment  be  used  for  any  other  purpose 

than  for  the  contract  for  which  it  was  purchased ; 
if  so,  for  what  class  of  product  can  such  equip- 
ment be  used,  stating  particularly  whether  or  not 
the  product  is  one  which  is  being  manufactured 
in  the  particular  plant  or  elsewhere. 

3.  In  the  estimated  value  of  the  equipment  at  the  end 

of  the  contracts  in  question,  the  basis  of  the  valua- 
tion of  the  machinery  or  equipment  should  be 
stated  in  connection  with  that  outlined  under  (2). 

4.  If  the  macliinery  or  equipment  is  of  such  character 

that  it  cannot  be  used  in  connection  with  any  other 
work,  the  value  should  be  appraised  accordingly. 

5.  The  scrap  value  of  the  machinery  and  equipment  in- 

dependent of  all  differences  should  also  be  stated. 

Before  final  action  is  taken  to  amortize  machinery  and 
equipment  as  in  the  outline  above,  it  would  be  advisable  to 
have  a  qualified  engineer  report  on  the  matter  in  question. 

Maintenance,  Repairs,  and  Renewals 

The  cost  of  maintenance,  including  repairs  and  renewals, 
is  often  charged  against  the  reserve  for  depreciation,  for  the 
reason  that  depreciation  rates  are  established  after  taking  into 
consideration  the  estimated  cost  of  maintenance  during  a  given 
period  of  time.  Wherever  the  cost  of  maintenance  is  charged 
as  a  separate  item  of  overhead,  provision  should  be  made  for 
its  distribution  over  departments.  If  the  cost  of  each  indi- 
vidual repair  and  renewal  order  is  compiled  separately,  the 


l62  DETAILED  FACTORY  REPORTS 

charge  may  be  applied  directly  to  the  department  in  which  the 
repair  is  made.  In  large  manufacturing  plants  this  may  be 
readily  done. 

The  cost  of  maintenance  comprises  two  classes  of  repairs 
and  renewals: 

1.  Repairs  which  are  a  daily  occurrence  and  practically 

in  the  nature  of  up-keep.  Such  items  refer  to  the 
repair  of  belts,  doors,  and  miscellaneous  equip- 
ment, and  small  tools. 

2.  Repairs  or  renewals  which  are  more  or  less  extraor- 

dinary in  character,  such  as  those  where  the 
volume  of  work  is  so  large  as  to  make  it  more 
equitable  to  distribute  the  total  cost  over  a  longer 
period  of  time  than  one  month. 


CHAPTER  XI 

DISTRIBUTION  OF  FACTORY  OVERHEAD 

Direct  and  Indirect  Distribution  of  Overhead 

We  have  seen  that  the  elements  of  prime  cost,  which  in- 
clude material  and  labor,  are  applied  directly  to  the  product. 
Any  factory  expenses  which  can  be  treated  as  a  direct  expense 
charge  are  applied  in  the  same  way,  and  when  this  is  done 
they  are  taken  out  of  the  class  of  factory  overhead.  If 
it  were  possible  to  assign  all  items  composing  the  factory  over- 
head expenses  directly  to  the  product  manufactured,  true  costs 
would  be  obtained  very  easily;  but  this  can  seldom  be  done. 
It  is  best,  however,  to  assign  as  many  of  the  indirect  charges 
as  possible  directly  to  the  product  to  which  they  relate,  thus 
tending  to  reduce  to  a  minimum  the  total  amount  of  factory 
overhead  to  be  applied  indirectly. 

The  factory  overhead  that  cannot  be  absorbed  in  the 
article  cost  directly  is  applied  indirectly  in  the  following  man- 
ner: 

1.  The  elements  of  factory  overhead  cost  are  assigned 

equitably  to  specific  departments  of  the  factory, 
including  productive,  non-productive,  and  miscel- 
laneous departments. 

2.  The  total  cost  of  the  indirect  departments  is  then 

transferred  to,  and  distributed  over,  the  productive 
departments  on  some  fair  basis. 

3.  The    total    amount    of    factory    overhead    expenses 

chargeable  to  each  productive  department  is  de- 
termined, and  is  then  distributed  over  the  various 
jobs,  orders,  articles,  or  processes. 
.163 


1 64         DETAILED  FACTORY  REPORTS 

Each  item  of  overhead  is  not  necessarily  apphcable  to 
all  departments  of  the  plant;  or  where  it  is,  it  will  not  be 
applicable  to  each  in  the  same  proportion.  Some  of  the  items 
relate  particularly  to  one  department,  whereas  others  relate 
to  two  or  more. 

The  only  equitable  way  of  ascertaining  true  costs  in  a 
large  factory,  is  by  computing  separate  departmental  rates  for 
the  overhead  affecting  the  commodities  which  pass  through 
each  department.  In  smaller  plants,  and  under  some  condi- 
tions, the  product  manufactured  may  be  of  such  a  character 
that  one  overhead  rate  is  applicable  to  the  entire  production 
of  the  plant.  Examples  of  this  kind  are  rare,  however,  and 
in  adopting  a  plan  for  distributing  factory  overhead  expenses, 
care  should  be  exercised  to  ascertain  the  departmental  over- 
head in  the  correct  way  at  the  start. 

General  Operating  Expenses 

In  large  manufacturing  plants  it  is  impossible  to  charge  all 
items  of  factory  overhead  to  definite  departments.  After  all 
expenses  which  can  be  so  applied  are  charged  to  the  depart- 
ments in  which  they  originate  or  to  which  they  obviously  be- 
long, there  are  some  which  relate  to  the  plant  as  a  whole. 
These  items  are  often  summarized  under  the  caption  "General 
Operating  Expenses."  After  their  total  is  ascertained,  it  is 
distributed  over  all  the  departments  of  the  plant  on  some 
arbitrary  basis.  In  this  way  the  general  operating  expenses 
are  included  in  the  departmental  overhead  rates  which  are  as- 
certained after  the  total  overhead  of  each  of  the  non-productive 
departments  has  been  distributed  to  the  productive  depart- 
ments. 

Under  some  conditions  it  is  practicable  to  treat  the  gen- 
eral operating  expenses  as  a  separate  item  of  cost,  in  which 
case  a  separate  rate  is  provided  for  absorbing  this  fourth 
element  of  factory  cost  in  the  cost  of  the  articles  manufac- 


DISTRIBUTION  OF  FACTORY  OVERHEAD  165 

tured.  In  other  cases  the  general  operating  expenses  are  ab- 
sorbed in  the  article  cost  by  the  addition  of  a  certain  percentage 
to  the  departmental  overhead  rates.  Whether  they  should  be 
applied  to  the  product  as  a  separate  item  of  cost,  or  as  part 
of  the  overhead  of  departments,  must  be  determined  by  the 
circumstances  of  the  case. 

Methods  of  Distributing  Overhead 

Assuming  the  departmental  method  of  distributing  over- 
head has  been  adopted,  there  still  remains  the  most  complex 
problem  of  all — upon  what  basis  shall  the  overhead  be  distrib- 
uted within  the  departments  so  that  each  job,  order,  or  article 
may  be  charged  with  the  portion  that  properly  belongs  to  it? 
To  illustrate,  it  may  be  assumed  that  high-priced  and  low- 
priced  men  work  side  by  side,  or  that  there  are  machines  of 
different  size  and  value  operated  by  men  who  draw  the  same 
wages,  or  that  the  operations  involve  about  equal  parts  of 
machine  work  and  work  by  hand — all  of  which  are  quite  ordi- 
nary conditions.  Shall  the  basis  for  the  distribution  of  the 
departmental  overhead  be  the  cost  of  the  labor  expended  upon 
the  work,  or  the  time  given  to  it  in  the  department  ?  Does  the 
cost  of  material  enter  in  as  a  factor  ?  Is  a  machine  rate  possi- 
ble or  practical  ?  These  are  some  of  the  questions  which  must 
be  answered,  and  answered  correctly,  if  the  cost  results  are 
to  be  accurate.  Thus,  no  one  method  of  distributing  indirect 
expense  can  be  applicable  to  all  cases;  everything  depends  on 
the  particular  conditions. 

It  is  not  the  intention  here  to  attempt  to  describe  in 
detail  every  method  that  may  be  employed,  but  only  those 
which  are  commonly  used  at  the  present  time  and  which,  as 
more  or  less  standard  methods,  may  be  satisfactorily  applied 
under  definite  conditions  of  manufacture.    These  are: 

1.  Prime-cost  method 

2.  Productive-labor-cost  method 


l66  DETAILED  FACTORY  REPORTS 

3.  Productive-labor-hours  method 

4.  Machine-rate  methods 

5.  Miscellaneous  methods 

The  above  methods  of  distribution  may  be  further  classi- 
fied under  the  three  broad  divisions  described  below : 

1.  Material  and  labor  methods,  in  which  the  combined 

material  and  labor  costs  furnish  the  basis  for  the 
distribution  of  expense. 

2.  Labor  methods,  in  which  the  labor  cost  or  the  labor 

hour  furnishes  the  basis  for  the  distribution  of 
expense. 

3.  Machine  methods  in  which  the  operating  time  of  the 

various  machines  furnishes  the  basis  for  distribut- 
ing the  items  of  expense. 

I.  Prime-Cost  Method 

Under  simple  conditions  the  method  most  generally  used 
by  small  manufacturing  concerns  for  charging  departmental 
overhead  to  the  product  is  the  prime-cost  method.  Of  all 
methods  it  is  the  most  simple,  and  its  presence  is  discernible 
even  under  conditions  where  no  cost  systems  are  in  operation. 
In  most  businesses,  for  example,  where  a  complete  cost  sys- 
tem is  not  operated,  an  attempt  is  made  to  ascertain  costs 
when  fixing  selling  prices  by  carefully  calculating  the  material 
and  labor  costs ;  but  as  regards  the  overhead,  complete  records 
are  not  available  to  determine  what  percentage  should  be 
added  to  the  material  and  labor  costs  to  cover  all  items  of 
expense.  All  too  frequently  in  this  percentage,  selling  and 
administrative  expenses  are  combined  with  factory  overhead 
items.  This  rough  and  ready  method  of  lumping  all  expense 
items  together  is  inaccurate  for  the  reason  that  if  inventory 
values  are  based  upon  costs  which  include  selling  and  admin- 
istrative expenses,  these  values  will  be  inflated. 


DISTRIBUTION  OF  FACTORY  OVERHEAD  167 

Calculation  of  Prime-Cost  Rate 

To  obtain  the  proper  percentage  to  be  used  in  applying 
the  prime-cost  method,  it  is  necessary  to  divide  the  total  over- 
head expenses  by  the  total  material  and  labor  costs,  the  result 
being  a  decimal  figure  which  is  the  rate  to  be  used.  Reduced 
to  a  formula,  the  procedure  is  as  follows : 

Percentage  to  be  added  to  the 

Overhead  costs ^^^     total     material     and     labor 

Material  cost  "h  labor  cost  costs  to  cover  the  overhead 

expenses. 

For  example,  if  during  a  definite  period  the  amount  ex- 
pended for  all  direct  material  is  $20,000,  and  for  direct  labor 
is  $30,000,  and  overhead  expenses  for  the  same  period  are 
$25,000,  the  percentage  to  be  used  in  distributing  overhead 
costs  over  the  product  or  article  would  be  ascertained  as  fol- 
lows: 

Overhead  cost  $25,000 50%  to  be  added  to  the  prime 

Material  cost  $20,000   +  cost  to  cover  the  overhead 

labor  cost  $30,000  on  the  article. 

Thus,  if  the  material  cost  of  an  article  is  $10,  its  direct 
labor  cost  is  $5,  and  the  overhead  rate  is  found  to  be  50% 
of  the  prime  cost,  the  total  production  cost  would  then  be 
stated  as  follows : 

Material  cost $10.00 

Labor  cost  5.00 

Overhead  cost  (50%  of  $15)    7.50 

Total   cost    $22.50 

The  correct  application  of  the  prime-cost  method  depends 
upon  the  accuracy  of  the  percentage  rate  established.  This 
rate  is  usually  based  upon  past  experience  as  ascertained  from 
the  financial  statements  covering  prior  periods.  Often,  how- 
ever, the  percentage  is  fixed  by  business  custom  and  largely 
depends  upon  what  manufacturers  in  the  same  line  of  business 
are  using  as  a  basis  for  arriving  at  their  selling  prices. 


1 68  DETAILED  FACTORY  REPORTS 

Advantages  and  Disadvantage 

The  chief  arguments  in  favor  of  the  prime-cost  method 
of  distributing  overhead  are  the  simpHcity  of  the  plan  and  the 
few  records  required.  Its  disadvantage  is  that  as  indirect  ex- 
penses are  not  applied  to  each  class  of  merchandise  manufac- 
tured in  the  same  proportion  for  each  departmental  process 
or  for  different  methods  of  manufacture,  the  use  of  this  method 
often  results  in  inaccurate  article  costs.  The  fault  is  very 
marked  when  certain  articles  pass  through  only  a  few  depart- 
mental processes,  while  others  undergo  all  or  nearly  all  proc- 
esses of  manufacture.  Under  these  conditions,  some  articles 
may  be  burdened  with  a  share  of  the  overhead  expenses  of  one 
or  more  departments  through  which  they  do  not  pass. 

Attempts  have  been  made  to  overcome  the  foregoing  de- 
fect of  the  prime-cost  method  of  distributing  overhead  by 
establishing  a  percentage  rate  for  each  department;  but  this 
leads  to  difficulties,  for  the  reason  that  material  does  not  form 
part  of  the  cost  in  every  department  through  which  the  article 
passes.  The  costs  in  those  departments  where  no  material  is 
used  consist  only  of  labor  and  overhead,  and  therefore  no 
prime-cost  method  could  be  established. 

Manufacturers  may  be  led  into  fatal  errors  by  placing 
too  great  reliance  upon  costs  which  are  inaccurately  obtained. 
Percentage  plans  of  this  character  do  not  provide  for  a  com- 
prehensive analysis  of  costs,  and  too  often  the  true  value  of 
a  more  accurate  method  of  expense  distribution  is  relinquished 
for  the  sake  of  simplicity.  It  should  be  noted  that  every  de- 
partment of  a  plant  usually  has  its  own  special  equipment  and 
may  differ  from  other  departments  greatly  in  its  capital  in- 
vestment, the  labor  it  employs,  the  floor  space  occupied,  the 
power  consumed,  and  in  numerous  other  details.  Therefore, 
any  method  of  overhead  distribution  which  fails  to  recognize 
and  analyze  these  inequalities,  fails  to  utilize  the  natural  cen- 
ters and  the  most  efficient  basis  for  overhead  distribution. 


DISTRIBUTION  OF  FACTORY  OVERHEAD  169 

Conditions  under  which  Inapplicable 

Under  the  prime-cost  method  of  expense  distribution, 
the  cost  of  material  is  recognized  as  one  of  the  factors  that 
give  rise  to  indirect  expenses.  If  the  method  is  used  out  of 
its  special  field,  where  the  necessary  uniform  conditions  do 
not  exist  and  where  the  material  cost  varies  considerably  from 
the  labor  cost,  the  results  are  quite  unreliable. 

An  illustration  will  bring  out  forcibly  the  reason  for  the 
inaccuracy.  Assume  that  in  a  jewelry  establishment  two 
gold  rings  are  made  in  practically  the  same  manner,  without 
stones  in  the  settings,  and  that  the  cost  of  material  (gold) 
amounts  to  $5  for  each  ring.  In  one  ring  a  diamond  costing 
$50  is  then  mounted,  which  makes  the  material  cost  of  that 
ring  $55.  In  the  other  ring  a  diamond  is  set  worth  $200,  mak- 
ing the  material  cost  $205.  As  the  labor  cost  is  the  same  in 
both  cases,  to  the  more  expensive  ring  would  be  added  about 
four  times  as  much  overhead  as  to  the  cheaper  ring;  yet 
logically  no  more  overhead  should  be  added  to  one  ring  than 
to  the  other.  If  any  additional  element  of  overhead  were 
added  to  the  more  expensive  ring,  it  should  be  only  for  such 
items  as  insurance,  interest,  and  other  special  charges  in- 
curred in  handling  the  more  costly  setting.  The  more  accu- 
rate method  in  this  case  would  be  to  base  the  overhead  cost 
of  the  rings  upon  the  cost  of  the  labor,  or  hours  of  labor, 
spent  in  producing  them — methods  of  distribution  to  be  ex- 
plained in  following  sections. 

2.  Productive-Labor-Cost  Method 

The  productive-labor-cost  method  is  based  upon  the  prin- 
ciple that  indirect  expenses  are  incurred  in  proportion  to  the 
cost  of  the  labor  involved.  To  operate  the  plan,  the  total 
amount  of  overhead  expenses  for  a  definite  period  is  divided 
by  the  total  cost  of  the  direct  labor  for  the  same  period.  This 
shows  the  proportion  of  the  overhead  expenses  to  the  total 


170  DETAILED  FACTORY  REPORTS 

productive  labor  in  terms  of  percentage.  The  amount  of  over- 
head to  be  assigned  to  any  article  is  then  found  by  multiplying 
the  direct  labor  cost  by  the  percentage,  the  result  being  the 
amount  of  the  indirect  expenses  to  be  added  to  the  prime  cost 
in  order  to  give  the  total  factory  cost.  The  same  principle 
applies  to  the  cost  of  any  job,  order,  article,  or  process.  This 
method  may  be  concretely  presented  by  means  of  the  following 
formula : 

rr.  ^  ,   r    ^  ,      ,  Percentage  of  productive   la- 

Total  factory  overhead      _^     ^or  cost   to  be  charged  to 

Total  productive  labor  cost  J°^»  order,  article  or  proc- 

ess. 

To  illustrate,  assume  that  the  pay-rolls  for  a  certain  pe- 
riod show  payments  of  $16,000  for  direct  labor,  and  that  the 
factory  overhead  expenses  for  the  same  period  are  $14,000, 
or  87^%  of  the  direct  labor  cost.  If  a  man  works  on  an 
article  five  hours  at  ^2  cents  an  hour,  and  the  cost  of  the  direct 
material  is  60  cents,  the  total  production  cost  of  the  article 
may  be  stated  as  follows: 

Direct  material  cost  $  .60 

Direct  labor  cost 1.60 

Factory  overhead  cost  (871/2%  of  $1.60) 1.40 

Total  cost $3.60 

Applicability  of  Labor-Cost  Method 

The  simplicity  of  the  labor-cost  method  is  a  great  point  in 
its  favor,  but  at  the  same  time  offers  a  temptation  to  employ  it 
too  widely.  The  point  to  consider  is  how  far  the  particular 
conditions  are  in  accord  with  the  principle  of  the  method. 
To  fit  the  case  perfectly,  the  labor  should  be  the  dominant 
element  in  the  manufacturing  process,  and  there  should  be  a 
marked  uniformity  as  to  product,  wages  paid,  and  time  of 
operation  on  the  articles  manufactured.  These  conditions 
rarely  exist  throughout  an  entire  factory,  but  are  not  uncom- 
mon in  a  single  department.    If  applied  to  a  department  under 


DISTRIBUTION  OF  FACTORY  OVERHEAD  171 

the  conditions  stated,  the  method  will  prove  to  be  quite  accu- 
rate. 

When  the  productive-labor-cost  method  is  used  in  depart- 
ments equipped  with  machines,  special  care  must  be  exercised 
to  see  that  these  departments  are  uniform  as  to  cost  and  oper- 
ating expenses;  or,  if  not,  that  there  is  a  corresponding  dif- 
ference between  the  wages  paid  to  the  operators.  The  method 
is  less  accurate,  and  even  misleading,  if  these  uniformities  do 
not  exist.  For  instance,  if  a  low-priced  man  is  operating  an 
expensive  automatic  machine,  and  a  high-priced  man  is  work- 
ing at  a  cheap  machine  where  skill  amounts  to  more  than  the 
cost  of  operating  the  machine,  the  charges  for  indirect  ex- 
pense will  not  only  be  inaccurate  but  will  be  actually  reversed. 

The  productive-labor-cost  method  is  often  used  to  pro- 
rate unassigned  items  of  factory  overhead  to  the  operating 
departments  of  the  plant  when  the  data  upon  which  to  base  a 
more  intelligent  distribution  cannot  be  readily  obtained.  Any 
errors  which  might  result  from  the  distribution  of  the  un- 
assigned expenses  in  this  way  would  be  very  slight  in  most 
instances,  as  they  would  be  absorbed  in  the  cost  of  the  entire 
production  of  all  departments.  However,  only  an  examina- 
tion of  the  peculiar  circumstances  of  each  case  can  determine 
where  theoretical  accuracy  may  be  safely  sacrificed  for  sim- 
plicity and  practical  results. 

3.  Productive-Labor-Hours  Method 

The  principle  of  the  productive-labor-hours  method  dif- 
fers from  that  just  described  only  in  that  the  amount  of  labor 
is  measured  by  time  and  not  by  cost.  That  is  to  say,  the  over- 
head expenses  of  a  plant  are  considered  to  be  in  proportion  to 
the  number  of  employees  engaged  and  the  hours  they  work, 
rather  than  to  the  wages  paid.  To  operate  the  plan,  the  total 
amount  of  factory  overhead  expense  for  some  definite  period 
is  divided  by  the  total  number  of  productive  hours  of  work 


If^  DETAILED  FACTORY  REPORTS 

during  the  same  period,  the  result  being  the  rate  per  hour  to 
be  added  as  overhead  cost  to  the  prime  cost  of  the  product. 
Reduced  to  a  formula,  the  principle  may  be  stated  as  follows : 

Total  amount  of  factory 

overhead   expense  Rate  per  hour  to  be  applied 


to  the  number  of  hours  of 


Total  number  of  productive  work  upon  the  product, 

labor  hours 

Using  this  formula,  and  assuming  the  number  of  work- 
ing hours  of  direct  labor  to  be  56,000  and  the  factory  expense 
$14,000,  the  result  would  be: 

a,  e  25     cents    per    hour    to    be 

$14.000    factory    expense  charged    to    job,    order,    or 

(-5  000  hours  process  for  each  productive 

hour  of  work  spent  upon  it. 

The  total  cost  of  the  single  article  discussed  under  the 
preceding  method  would  then  be: 

Direct  material  cost   $  .60 

Direct  labor  cost  (5  hours  at  32  cents  per  hour).,       1.60 
Factory  overhead  cost  (5  hours  at  25  cents  per  hour)       1.25 


Total  cost $3.45 

An  analysis  of  the  difference  between  the  two  costs  will 
provide  the  best  basis  of  comparison  between  the  methods. 
The  critical  point  is  the  32  cents  per  hour  of  the  labor  cost. 
In  the  first  example  the  average  wage  per  hour,  found  .by 
dividing  $16,000  by  56,000,  is  only  28  4/7  cents.  Therefore, 
the  output  of  any  man  whose  pay  is  more  than  28  4/7  cents 
per  hour  has  to  bear  more  of  the  indirect  expense  in  the  first 
method  than  in  the  second. 

This  makes  it  clear  why  there  should  be  a  marked  uni- 
formity as  to  product,  wages,  and  time  of  operation  in  the 
direct-labor-cost  method.  Differences  in  any  of  these  factors 
tend  to  indicate  marked  discrepancies  in  costs  unless  it  can 
be  shown  that  there  are  corresponding  differences  in  the  di- 


DISTRIBUTION  OF  FACTORY  OVERHEAD  173 

rect  elements  of  cost.  This  has  to  be  shown  in  each  particular 
case ;  for  there  is  no  essential  reason  why,  as  between  two  men 
working  side  by  side,  the  output  of  the  higher-priced  man 
should  incur  more  overhead  costs  than  the  other.  On  con- 
sideration it  will  be  evident  that,  on  the  whole,  factory  over- 
head expense  is  more  a  function  of  time  than  of  labor  cost. 
If  the  items  that  make  up  the  factory  overhead  are  examined 
one  by  one,  as  indirect  labor  items,  rent,  insurance,  taxes, 
interest,  depreciation,  maintenance,  repairs,  renewals,  light, 
heat,  power,  etc.,  it  will  be  seen  at  once  that  the  majority, 
though  not  all  of  them,  accumulate  according  to  time  and  have 
but  a  very  slight  connection  with  the  rate  of  wages. 

The  conclusion  is  clear  that,  other  conditions  being  equal, 
the  productive-labor-hours  method  is  applicable  to  a  wider 
field  than  the  productive-labor-cost  method.  Certain  limita- 
tions remain,  viz.,  the  labor  should  be  a  dominant  factor,  and 
for  the  most  part  the  product  should  be  uniform.  Where 
machines  are  used,  the  same  precautions  must  be  taken  as  in 
the  case  of  the  previous  method  except  that  the  wages  of  the 
operators  may  be  disregarded. 

4.  (a)  Machine-Rate  Methods 

All  machine-rate  methods  are  based  upon  the  principle 
that  overhead  expense  accrues  in  proportion  to  the  number 
of  hours  of  machine  operation.  The  modern  appHcation  of 
the  machine-rate  principle  covers  two  important  points  which 
are  as  follows: 

1.  It  recognizes  and  provides  for  differences  in  over- 

head expense  that  arise  from  the  operation  of 
different  kinds  of  machines. 

2.  It  is  specifically  devised  to  absorb,  as  direct  charges, 

all  overhead  expense  that  can  be  associated  directly 
or  indirectly  with  the  operation  of  any  machine 
or  particular  area  of  the  plant. 


174  DETAILED  FACTORY  REPORTS 

In  installing  the  machine-rate  method,  the  department  is 
taken  as  the  unit  whenever  possible;  but  if  a  department  in- 
cludes different  machines  or  processes,  a  further  subdivision 
of  the  departmental  charges  must  be  made.  The  essential 
point  is  to  reduce  the  unit  to  processes  of  the  same  kind,  or  to 
the  machines  used  in  such  processes,  even  if  this  carries  it 
down  to  the  single  machine. 

The  object  in  view  is  to  collect  the  direct  labor  cost  and 
overhead  expense  against  each  machine  or  process  in  such  a 
way  as  to  ascertain  what  it  actually  costs  to  operate  the  ma- 
chine per  hour,  i.e.,  what  the  hourly  machine  rate  is  when  the 
operations  or  processes  have  been  classified  and  the  charges 
have  been  made,  each  item  being  considered  by  itself.  In  ob- 
taining the  charge  per  hour,  which  includes  the  direct  labor 
cost  as  well  as  the  overhead  cost,  only  the  actual  number  of 
operating  hours  for  the  cost  period  is  taken  into  considera- 
tion. 

There  are  various  forms  of  machine-rate  methods,  termed 
"old-machine-rate,"  "new-machine-rate,"  "fixed-machine-rate," 
"scientific-machine-rate,"  and  "supplementary-machine-rate." 
They  can  all  be  specifically  commended  where  machines  are 
largely  used,  for  the  reason  that  all  items  of  overhead  expense 
are  gathered  at  the  "point  of  the  tool,"  so  to  speak,  where  they 
are  easily  applied  to  the  product.  The  method  in  all  cases  is 
to  utilize  a  machine  or  group  of  like  machines — termed  pro- 
duction centers — for  distributing  overhead  expenses. 

Wherever  the  machinery  is  of  more  importance  than  the 
human  element  and  the  workman  is  merely  a  tender  or  the 
tool  of  the  machine,  the  machine-rate  plan  will  be  the  most 
equitable  method  of  distributing  overhead  expense.  On  the 
other  hand,  if  the  skill  of  the  workman  is  required  to  make 
the  product,  and  the  machine  is  of  secondary  importance,  i.e., 
a  tool  used  in  the  production,  either  the  productive-labor-cost 
method  or  productive-hour  method  is  more  accurate. 


DISTRIBUTION  OF  FACTORY  OVERHEAD  175 

Method  of  Compiling  Machine  Rate 

In  ascertaining  the  machine  rate,  the  direct  labor  cost  is 
obtained  from  labor  reports,  as  is  also  the  number  of  operating 
hours.  The  material  cost  may  also  be  combined  with  the  direct 
labor  and  overhead  cost  before  the  machine  rate  is  fixed,  if 
the  materials  operated  on  are  the  same  in  grade  or  price.  If 
price  or  grade  varies,  the  material  cost  should  not  be  so  in- 
cluded. Expenses  which  are  more  or  less  fixed  in  character, 
such  as  rent,  insurance,  taxes,  interest,  and  depreciation,  accu- 
mulate and  are  chargeable  to  a  machine  whether  it  is  operated 
or  not.  These  charges  are  usually  applied  upon  the  basis  of 
floor  space  or  valuation  of  the  equipment. 

Depreciation  is  charged  to  each  machine  at  a  rate  per 
hour  ascertained  by  dividing  the  total  cost  of  the  machine,  less 
its  scrap  value,  by  the  estimated  number  of  working  hours  of 
its  life.  In  some  cases,  where  machines  stand  idle  for  a  con- 
siderable length  of  time,  charges  applicable  to  them  are  dis- 
tributed over  an  entire  operating  department  instead  of  ap- 
portioning them  among  the  idle  machines.  In  this  way  these 
expenses  are  distributed  and  absorbed  in  the  cost  of  all  product 
which  goes  through  the  operating  department. 

The  power  cost  chargeable  to  a  particular  machine  should 
be  based  on  consumption.  An  allowance  for  horse-power  lost 
in  transmission  may  be  made  if  great  exactness  is  required. 
If  no  such  allowance  is  called  for,  the  first  step  in  determining 
power  charges  is  to  calculate  the  horse-power  hours  of  all 
machines  operated.  This  is  done  by  multiplying  the  horse- 
power of  each  machine  by  the  number  of  hours  it  is  operated 
and  adding  the  individual  totals.  Any  power  generated  at 
the  engine  but  not  indicated  in  the  above  total,  is  simply  con- 
sidered as  unutilized  power,  the  cost  of  which  is  borne  pro 
rata  by  all  the  machines. 

After  all  the  charges  have  been  made  directly  to  the  vari- 
ous machines,  the  balance  of  the  indirect  expenses  which  can- 


176  DERAILED  FACTORY  REPORTS 

not  be  directly  connected  with  machine  operation  must  be  con- 
sidered. These  are  of  two  classes — expenses  that  can  be  iden- 
tified with  certain  departments,  and  general  operating  expenses 
for  the  plant  as  a  whole.  Each  department  adds  to  its  own  de- 
partmental indirect  expense  its  share  of  the  general  operating 
expense,  and  proceeds  to  distribute  the  total  over  its  own 
product  in  accordance  with  the  plan  of  expense  distribution 
which  seems  best  to  fit  the  needs  of  the  case.  For  example, 
if  the  departmental  costs  are  based  on  a  unit  of  measure,  as  a 
ton  or  gallon,  a  score  or  dozen,  the  total  indirect  expense 
of  the  department  is  divided  by  the  total  units  of  output,  giving 
the  rate  per  unit.  The  rate  so  obtained  is  used  to  charge 
the  machines  or  processes  with  their  proportion  of  overhead, 
by  multiplying  the  number  of  units  of  product  operated  on 
in  either  case,  by  the  rate  per  unit. 

If  the  costs  are  based  on  time,  the  departmental  expense 
is  divided  by  the  total  number  of  machine-operating  hours. 
This  rate  is  added  to  the  direct  rate  already  established,  giving 
the  complete  or  final  rate  per  hour  to  be  charged  to  the  product 
of  that  department.  After  all  indirect  and  general  operating 
expenses  have  been  applied  to  a  machine,  the  formula  for  as- 
certaining the  machine  rate  would  be  as  follows : 

Total  amount  of  productive 
labor  +  total  amount  of 

overhead  applicable  to  a  ,,    ,  .  , 

machine  Machme  rate  to  be  applied  to 


product    for    each    hour    of 


Total  number   of  machine-  machine  operation, 

operating  hours 

Assuming  that  an  article  passes  through  several  machine  proc- 
esses, its  overhead  cost  is  arrived  at  by  multiplying  the  hours 
of  each  process  and  adding  together  the  separate  totals  thus 
obtained.  Material  costs  must  then  be  added  to  the  process 
cost  to  give  the  final  factory  cost. 

The  scope  of  the  machine-rate  method  is  covered  by  the 


DISTRIBUTION  OF  FACTORY  OVERHEAD  177 

foregoing  descriptions.  It  can  be  used  when  all  operations 
are  performed  by  machines,  but  it  cannot  be  applied  to  general 
bench-work  and  miscellaneous  forms  of  hand  labor. 

4.  (b)  Fixed  Machine-Rate  Method 

The  fixed  machine  rate  is  characterized  by  three  special 
features : 

1.  The  rate  itself  is  an  estimate  and  is  made  in  advance, 

2.  The  rate  is   estimated  on  the  basis  that  every  ma- 

chine in  the  shop  will  run  full  time. 

3.  All  charges  unabsorbed  by  the  estimated  fixed  rate 

are  distributed  through  a  supplementary  rate,  the 
special  feature  of  which  is  its  relation  to  idle  time. 

Without  going  into  a  detailed  explanation,  it  may  be 
well  to  state  that  this  fixed  method  is  neither  an  accurate  nor 
a  practical  method  of  distributing  overhead  for  several  rea- 
sons :  first,  the  rate  is  an  estimate  and  not  a  fact ;  second,  it 
is  based  on  every  machine  in  a  shop  running  full  time,  which 
is  rarely  the  case;  and  third,  the  adjustment  to  actual  condi- 
tions is  made  by  means  of  a  supplementary  rate,  which  de- 
stroys the  accuracy  of  the  overhead  distribution  to  product. 

The  only  commendable  feature  in  connection  with  this 
rate  is  the  fact  that  it  provides  a  record  of  idle  machine  time. 
While  this  is  very  valuable  data,  it  could  be  compiled  in 
a  supplementary  statistical  record  without  the  necessity  of 
using  it  as  a  method  of  overhead  distribution. 

4.  (c)  Sold-Hour  Method 

A  simplification  of  the  machine-rate  plan  is  that  known 
as  the  "sold-hour"  method.  The  principle  on  which  it  is  based 
is  that  the  services  of  a  particular  department  (usually  one  in 
which  the  machine  equipment  is  not  very  elaborate)  are  "sold" 
for  so  much  an  hour  regardless  of  the  type  of  machinery  or 


178         DETAILED  FACTORY  REPORTS 

grade  of  labor  employed.  The  hourly  rate  is  determined  by 
combining  the  departmental  overhead  with  its  total  wages,  and 
dividing  the  sum  thus  obtained  by  the  number  of  hours  of 
work  spent  on  jobs  within  a  given  period — taking  the  average 
figures  of  a  normal  period.  As  an  example,  if  wages  plus 
overhead  average  $5,000,  and  5,000  productive  hours  cover  the 
work  of  a  cost  period,  the  charge  to  jobs  would  be  $1  for  each 
hour's  work  spent  upon  them. 

The  ease  with  which  costs  can  be  computed  by  this  simple 
method  makes  its  use  applicable  where  other  methods  would 
prove  cumbersome  or  superfluous  in  their  greater  detail.  It  is 
especially  appropriate  to  conditions  where  the  work  partakes 
of  the  nature  of  a  service  rendered.  For  this  reason  the 
method  is  generally  applied  to  the  composing  departments 
of  printeries,  and  to  departments  where  experimental  or  sim- 
ilar work  is  carried  on.  In  both  these  instances  jobs  are 
handled  strictly  in  conformity  with  the  wishes  of  the  customer, 
and  an  average  charge  for  the  hourly  services  of  the  depart- 
ment is  a  truer  index  of  cost  than  would  be  a  charge  made  in 
any  other  way. 

5.  Miscellaneous  Methods 

Various  modifications  and  combinations  of  methods  for 
the  distribution  of  overhead  have  been  devised  to  meet  special 
conditions  in  different  lines  of  business.  For  the  most  part 
they  are  "percentage"  plans  in  some  form  or  other.  It  has 
been  shown  that  accurate  costs  cannot  be  obtained  by  the  addi- 
tion of  an  arbitrary  percentage  to  the  prime  cost  of  the  prod- 
uct, except  under  the  most  elementary  conditions  where  there 
is  only  one  class  of  product  and  all  processes  are  the  same. 
This,  however,  does  not  forbid  the  application  of  a  percentage 
to  the  output  of  a  particular  department  for  the  distribution 
of  departmental  expenses.  In  fact,  the  productive-labor-cost 
method  is  a  percentage  plan,  but  is  not  an  arbitrary  percentage 


DISTRIBUTION  OF  FACTORY  OVERHEAD 


179 


plan,  since  it  is  based  on  one  of  the  important  factors  of  gro- 
duction. 

The  manufacturing  conditions  under  which  an  arbitrary 
percentage  may  be  safely  used  for  the  distribution  of  expense 
must  be  judged  by  direct  observation.  Wherever  employed, 
the  percentage  method  usually  fails  to  distribute  the  overhead 
as  accurately  as  the  other  methods  described. 

In  shops  where  the  material  constitutes  much  the  larger 
part  of  the  prime  cost  and  where  the  processes  are  uniform, 
overhead  may  be  distributed  upon  the  basis  of  weight,  quan- 
tity, or  number — as  so  much  per  ton,  dozen,  gross,  hundred, 
and  so  on. 

Under  conditions  where  the  material  does  not  differ  in 
grade  or  price  to  any  considerable  degree,  or  where  the  work 
is  little  more  than  that  of  assembling  finished  parts  bought  in 
the  market,  the  cost  of  the  material  may  be  substituted  for 
the  quantity  as  the  unit  of  distribution.  However,  such  con- 
ditions are  only  found  in  a  small  business,  or  in  a  special  de- 
partment of  a  large  business. 

Overhead  may  also  be  distributed  over  departments  ac- 
cording to  the  number  of  employees  in  each.  This  method 
is  advocated  for  distributing  the  cost  of  police  protection  as 
outlined  in  Chapter  XXXII  in  the  section  on  "Guarding  of 
Property." 

Fixed  Versus  Fluctuating  Rates 

After  the  particular  method  for  the  distribution  of  over- 
head has  been  decided  upon  and  the  rates  determined,  the 
question  arises  as  to  the  length  of  time  the  rates  shall  be 
adhered  to.  Output  in  most  plants  fluctuates  from  month  to 
month,  and  most  factories  experience  dull  seasons  which  are 
offset  by  exceptionally  busy  periods.  Therefore,  the  question 
arises  as  to  the  better  plan  to  pursue.  Should  a  fixed  rate  be 
established  to  be  used  throughout  an  entire  fiscal  period  or 


l8o  DETAILED  FACTORY  REPORTS 

should  the  rate  be  changed  at  the  end  of  each  cost  period? 

When  the  product  is  subject  to  seasonal  demands,  it  is 
advisable  to  adhere  to  a  fixed  or  predetermined  rate  based 
upon  past  experience  until  the  cost  data  show  that  it  is  unre- 
liable. At  no  time  should  a  fixed  and  arbitrary  rate  be  used 
for  a  definite  period  if  it  does  not  insure  accurate  costs. 

In  establishing  a  fixed  rate  for  a  future  period,  the  .fig- 
ures should  be  based  on  those  of  past  experience.  In  some 
cases  the  rates  are  based  on  the  average  figures  of  three  to 
five  years.  This  practice  leads  to  errors,  as  it  is  rarely  nec- 
essary to  take  more  than  one  year's  transactions  as  a  basis 
for  establishing  an  overhead  rate.  The  averaging  of  a  long 
period  too  often  covers  up  details  which  would  be  apparent  if 
one  particular  year's  figures  only  were  analyzed  and  used. 
In  small  plants  the  figures  for  six,  three,  or  even  one  month 
may  be  adequate. 

After  the  rates  based  on  past  experience  are  compiled, 
they  should  be  carefully  checked.  Questions  as  to  future 
changes  in  policy  should  then  be  considered.  Increases  in 
overhead  are  bound  to  occur  in  every  progressive  factory,  and 
the  rates  should  be  brought  as  nearly  up  to  date  as  possible 
so  as  to  include  increases  which  may  occur  in  the  immediate 
future.  After  the  results  for  both  past  and  future  periods 
have  been  properly  considered,  a  fixed  rate  may  be  established 
until  such  time  as  it  proves  to  be  inaccurate.  When  over- 
head rates  are  fixed  at  the  beginning  of  the  period,  the  rou- 
tine work  of  cost  accounting  is  simplified.  It  is  not  necessary 
to  wait  and  hold  up  valuable  cost  data  until  the  current  rate 
is  compiled. 

When  fluctuating  rates  are  used,  they  must  necessarily 
be  ascertained  at  the  end  of  the  month  or  the  cost  period. 
This  necessitates  postponing  the  compilation  of  complete  costs 
until  all  items  of  indirect  expense  are  recorded  and  the  over- 
head rate  is  ascertained,  which  is  after  the  books  have  been 


DISTRIBUTION  OF  FACTORY  OVERHEAD  i8i 

closed.  To  avoid  this  delay,  the  rate  of  the  previous  month 
may  be  used,  and  changed  only  if  the  current  month's  trans- 
actions indicate  that  this  is  necessary.  If  the  rates  are  based 
on  the  figures  of  the  current  month,  valuable  cost  information 
may  not  be  furnished  promptly  to  the  management  because 
the  cost  department  must  wait  until  the  end  of  the  month 
before  preparing  the  statistics.  Therefore,  whenever  possible, 
fixed  overhead  rates  with  complete  accounting  records  for 
proving  their  accuracy  are  to  be  preferred. 

Adjustment  of  Factory  Overhead 

After  it  has  been  determined  whether  or  not  it  is  more 
practicable  to  use  fixed  or  fluctuating  percentages  or  rates,  con- 
ditions may  change  and  thus  upset  all  previous  overhead  cal- 
culations.    At  such  times  adjustments  are  necessary. 

For  instance,  when  an  accounting  is  made  at  the  end  of 
a  cost  period  it  may  be  found  that  some  of  the  overhead  still 
remains  to  be  absorbed,  or  that  the  percentages  and  rates 
are  too  high  and  therefore  the  factory  overhead  has  been 
what  is  termed  "over-applied" ;  in  either  case  the  records 
should  be  adjusted  to  show  true  costs.  If  it  is  discovered  that 
the  overhead  rates  have  not  been  properly  established,  new 
rates  should  be  prepared  immediately  and  put  into  use  as  soon 
as  practicable  after  errors  of  principle  have  been  disclosed. 

In  some  businesses  the  selling  prices  for  different  lines, 
or  for  the  entire  product,  are  established  in  advance  of  pro- 
duction and  are  based  on  predetermined  or  estimated  costs. 
In  such  a  case,  if  costs  are  underestimated  and  it  is  impos- 
sible to  correct  the  selling  prices  after  they  are  once  deter- 
mined, the  manufacturer  suffers  a  loss  on  orders  taken  in 
advance  and  priced  upon  overhead  rates  which  do  not  cover 
the  costs.  This  frequently  happens  when  orders  are  accepted 
for  future  delivery.  Selling  prices  of  merchandise  cannot  then 
be  changed  until  new  orders  are  taken  or  a  new  season  begins. 


l82         DETAILED  FACTORY  REPORTS 

Again,  abnormal  trade  conditions  sometimes  cause  or- 
ders to  fall  off,  with  a  consequent  decrease  in  production. 
Under  these  conditions,  the  overhead  percentages  or  rates 
normally  used  are  inadequate  to  apportion  the  total  factory- 
overhead  over  the  decreased  number  of  orders  received  when 
the  plant  cannot  be  kept  operating  full  time.  The  question 
then  arises  as  to  whether  or  not  to  change  the  overhead  per- 
centages and  thereby  increase  the  cost,  which  would  necessi- 
tate raising  the  prices  of  the  merchandise  manufactured.  If 
these  abnormal  conditions  are  temporary  in  character,  a  raise 
in  prices  may  cause  a  still  further  decrease  in  the  amount 
of  orders  received,  whereas  an  increase  in  business  is  neces- 
sary. All  these  are  points  to  be  carefully  considered  when  a 
change  in  the  rates  is  contemplated. 

When  the  class  of  trade  does  not  permit  the  absorption 
of  abnormal  overhead  in  the  article  cost,  normal  rates  should 
be  used  as  a  basis  for  selling  prices.  The  adjustments  then 
necessary  to  cover  the  unabsorbed  expense  should  be  charged 
directly  to  the  Profit  and  Loss  account  and  should  not  be 
included  in  the  overhead. 

When  it  is  discovered  that  the  rates  are  too  low  and  that 
for  several  months  overhead  has  been  under-absorbed,  it  may 
be  found  impossible  to  absorb  the  unapplied  overhead  in  the 
article  cost.  Under  these  circumstances  any  adjustments  in 
the  overhead  accounts  must  be  charged  to  the  Profit  and  Loss 
account.  No  provision  can  be  made  for  increasing  the  value 
of  the  merchandise  on  hand,  for  the  reason  that  there  is  no 
basis  for  apportioning  the  unapplied  overhead  to  the  cost  of 
the  articles  sold  and  to  the  cost  of  those  on  hand. 

In  like  manner,  when  factory  overhead  is  overapplied 
and  adjustments  need  to  be  made,  the  price  of  the  articles 
already  shipped  or  sold  cannot  obviously  be  changed,  while 
those  in  stock  may  be  valued  at  too  high  an  amount,  and  this 
may  lead  to  the  rendering  of  a  false  statement  of  financial 


DISTRIBUTION  OF  FACTORY  OVERHEAD 


183 


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l84  DETAILED  FACTORY  REPORTS 

condition.  Whenever  it  is  discovered  that  finished  stock  has 
been  valued  at  too  high  a  cost,  some  provision  must  be  made 
for  writing  down  this  overvaluation  to  a  proper  cost  basis. 
To  sum  up,  the  careful  computation  of  accurate  overhead 
rates  is  one  of  the  most  difficult  and  important  matters  in 
the  operation  of  every  cost  system.  The  figures  should 
represent  true  costs,  and  to  achieve  this  end  the  calculations 
should  be  checked  at  the  end  of  each  cost  period  and  any  dis- 
crepancies corrected  promptly.  Only  in  this  way  can  the  in- 
ventory valuations  be  accepted  as  reliable. 

Summary  of  Factory  Overhead 

The  items  which  make  up  the  factory  overhead  and  the 
methods  of  distributing  them  first  to  departments  and  then  to 
product  are  summarized  in  Form  31. 


CHAPTER  XII 

FACTORY  OVERHEAD  REPORTS 

The  Source  of  Overhead  Items 

Material  reports  are  definite  in  character  and  are  designed 
to  record  only  material  cost.  The  compiling  of  labor  cost  is 
also  definitely  provided  for  by  especially  designed  time  tickets 
or  other  labor  reports.  Factory  overhead,  being  the  most  com- 
plex element  of  cost,  is  compiled  from  divers  sources,  and 
therefore  the  items  are  obtained  from  various  records,  some 
of  which  are  used  for  different  purposes. 

In  small  manufacturing  plants  and  under  very  simple 
conditions  of  manufacture,  the  information  for  compiling  the 
factory  overhead  may  usually  be  obtained  from  one  record — 
the  expense  analysis  record.  In  larger  plants  the  sources 
from  which  the  factory  overhead  items  are  derived  are  nu- 
merous and  the  items  are  compiled  in  many  different  ways. 
These  sources  of  information  are  discussed  in  this  chapter. 

Reports  for  Recording  Indirect  Material 

The  indirect  material  items,  as  already  stated,  consist  of : 

1.  Direct  material  which  cannot  be  applied  in  a  direct 

manner 

2.  Supplies 

3.  Scrap  material 

4.  Small  tools  and  dies 

The  cost  of  direct  material  which  cannot  be  applied  in  a 
direct  manner  and  which  in  consequence  forms  part  of  the 
factory  overhead,  would  be  obtained  from  an  analysis  of  ma- 
terial requisitions.     The  details  of  these  requisitions  should 

185 


1 86  DETAILED  FACTORY  REPORTS 

be  summarized  separately  and  a  means  provided  for  includ- 
ing them  in  the  factory  overhead  at  the  time  all  other  items 
of  direct  material  are  summarized  and  charged  to  the  various 
departments,  jobs,  orders,  articles,  or  processes. 

Miscellaneous  supplies  are  used  by  almost  every  depart- 
ment of  a  plant,  and  the  sources  for  ascertaining  their  cost 
would  also  be  the  material  requisitions.  These  should  provide 
information  enabling  them  to  be  summarized  by  departments 
so  as  to  obtain  the  indirect  cost  of  the  supplies  used  in  each 
case. 

In  large  manufacturing  plants  indirect  material  and  sup- 
plies are  sometimes  transferred  from  one  department  to  an- 
other. When  this  is  done,  the  department  making  the  trans- 
fer should  receive  proper  credit  so  that  the  department  receiv- 
ing the  items  may  be  charged  for  their  use.  If  separate  de- 
partment stock  records  are  not  kept,  transfers  should  be  re- 
corded upon  especially  designed  reports.  These  should  be 
summarized  so  that  each  department  can  be  charged  with  the 
indirect  material  and  supplies  it  has  used. 

Complications  sometimes  arise  in  the  treatment  of  scrap 
material  as  a  part  of  the  overhead.  Such  portions  of  this  ma- 
terial as  can  be  used  again  for  manufacturing  other  articles 
should  not  be  included  as  part  of  the  overhead  cost.  The 
overhead  includes  only  such  scrap  material  as  is  worthless 
and  cannot  be  utilized  again  in  the  manufacturing  operations. 

Scrap  material  charges  applicable  to  the  factory  overhead 
are  generally  recorded  upon  a  specially  designed  scrap  ma- 
terial report  which  is  compiled  daily,  weekly,  twice  a  month, 
or  monthly,  as  required.  This  report  gives  details  as  to  how 
the  scrap  originated  and  also  details  as  to  kind  and  quantity, 
with  a  complete  description  of  its  nature  and  final  disposition. 

In  large  plants  where  complete  information  of  this  kind 
is  obtainable  the  scrap  material  reports  must  be  specially 
handled,  and  in  some  cases  credit  must  be  given  to  the  cost  of 


FACTORY  OVERHEAD  REPORTS  187 

a  particular  job,  order,  or  article  from  which  the  scrap  is  de- 
rived. In  these  instances  the  scrap  material  reports  would 
show  the  job  or  order  number,  or  the  nalme  and  number  of 
the  process  so  credited.  The  reports  would  then  be  sum- 
marized for  the  purpose  of  ascertaining  the  total  charge  to 
the  scrap  material  accounts,  and  also  the  total  credit  to  the 
direct  material  accounts.  In  addition  to  this  summarization 
the  detailed  scrap  material  reports  would  be  posted  as  a  credit 
or  deduction  from  the  material  cost  of  each  particular  job, 
order,  or  process  affected,  the  entry  being  made  upon  the  re- 
spective cost  sheets  for  each  job,  order,  or  process. 

The  cost  of  perishable  tools  and  dies  which  are  a  charge 
to  overhead  may,  when  it  is  practicable  to  trace  their  consump- 
tion, be  recorded  upon  especially  designed  tool  reports.  In 
large  manufacturing  plants,  however,  this  is  not  always  pos- 
sible, as  items  of  this  character  are  required  by  the  operators 
daily  and  in  consequence  are  loosely  handled.  To  keep  track 
of  them,  stock  recordo  should  be  kept  on  which  they  are 
charged  to  employees  as  issued.  Individual  employees  can, 
then  be  held  responsible  for  any  tool  which  disappears  or  is 
broken  while  in  their  possession.  While  this  is  theoretically 
the  best  way  of  handling  these  items,  in  actual  practice  they 
are  often  charged  to  overhead  by  means  of  a  depreciation 
rate  or  a  certain  fixed  amount  to  cover  the  probable  loss 
through  wear  and  tear.  If  complete  records  are  kept  of  the 
use  of  tools  by  departments,  these  records  would,  of  course, 
provide  a  means  for  charging  the  cost  of  perishable  tools  and 
dies  to  the  overhead  of  the  respective  departments  in  which 
they  are  used. 

In  small  plants,  where  a  stock-room  is  not  operated  and 
stock  records  are  not  kept,  the  cost  of  indirect  material  can 
usually  be  obtained  from  the  purchase  records  and  distribution 
book  or  purchase  analysis.  When  miscellaneous  supplies  are 
purchased  for  particular  operating  departments,  the  invoices 


l88  DETAILED  FACTORY  REPORTS 

for  the  goods  are  charged  on  the  purchase  book  directly  to 
the  overhead  of  the  departments  where  the  suppHes  are  to 
be  used. 

Reports  for  Indirect  Labor 

Indirect  or  non-productive  labor,  supervision  or  foreman- 
ship,  superintendence,  inspection,  factory  clerks'  salaries,  de- 
fective and  experimental  work,  as  well  as  the  time  of  produc- 
tive workers  not  applicable  to  a  definite  job,  order,  or  article, 
should  all  be  charged  to  the  factory  overhead.  The  last  item 
mentioned  includes  all  lost,  idle,  and  waiting  time,  and  pro- 
vision must  be  made  for  obtaining  information  as  regards 
such  time  from  the  various  labor  reports  which  are  submitted 
daily  by  the  factory  employees. 

In  some  large  factories  all  non-productive  time  is  re- 
ported upon  separate  non-productive  time  or  labor  reports. 
This  simplifies  the  preparation  of  the  analysis  of  overhead 
charges,  and  the  amount  to  be  charged  to  department  overhead 
is  then  very  readily  obtained. 

The  time  of  miscellaneous  helpers,  truckers,  sweepers,  re- 
pairmen, etc.,  who  do  principally  non-productive  work  is 
often  compiled  separately  when  the  pay-roll  is  prepared,  en- 
abling this  portion  of  the  non-productive  charge  to  be  obtained 
readily  from  the  pay-roll  records.  In  most  instances  the  pay- 
roll records  are  ruled  so  as  to  distinguish  between  the  produc- 
tive and  non-productive  time  of  departments,  thus  making 
unnecessary  any  detailed  analysis. 

Productive  and  non-productive  work  should,  if  possible, 
be  accounted  for  upon  separate  labor  reports.  This  is  espe- 
cially true  when  productive  workers  are  transferred  to  non- 
productive work  and  vice  versa,  either  in  or  between  depart- 
ments. As  in  the  case  of  supplies,  transfers  of  labor  of  this 
character  should  be  summarized  by  departments  so  that  the 
total  charge  and  total  credit  affecting  each  may  be  obtained. 


FACTORY  OVERHEAD  REPORTS  189 

The  expense  of  supervision  by  foremen  and  others  is  a 
more  or  less  fixed  item  of  overhead  which,  as  a  rule,  may 
be  obtained  from  the  pay-roll  records.  It  is  rarely  necessary 
for  the  supervisors  to  account  for  their  time  daily,  except  in 
small  shops  where  foremen  sometimes  do  productive  work 
in  addition  to  their  regular  work  of  supervision.  When  this 
is  the  case,  the  problem  arises  as  to  the  correct  amount  to  be 
charged  to  the  particular  job,  order,  or  article  for  the  fore- 
man's time. 

It  would  be  obviously  incorrect  to  burden  the  cost  of  the 
product  with  a  high  rate  for  the  foreman's  productive  time 
when  such  work  is  undertaken  as  a  matter  of  necessity,  as 
for  instance,  to  help  out  the  production  of  the  job,  or  to 
take  care  of  rush  work,  or  to  do  work  of  a  special  character. 
Under  these  circumstances,  a  regular  day  or  hourly  work  rate 
should  be  established,  based  on  the  average  wage  rate  paid  for 
such  work  in  the  department.  This  rate  is  used  for  ascertaining 
the  cost  of  the  direct  labor  charge  which  is  to  be  applied  to  the 
cost  of  the  article  produced.  When  the  foreman's  productive 
time  is  charged  as  a  direct  labor  cost,  the  overhead  account  of 
his  department  should  receive  credit  for  the  same  amount, 
thus  reducing  the  expense  of  supervision. 

In  large  manufacturing  plants  the  salaries  of  the  factory 
superintendent,  assistant  superintendent,  and  production  man- 
ager are  included  among  the  general  operating  expenses  and 
with  them  finally  distributed  to  the  departments.  The  amount' 
of  this  charge  is  usually  shown  on  the  pay-roll. 

When  inspection  charges  are  treated  as  part  of  the  factory 
overhead,  their  amount  is  obtained  from  labor  reports  and 
pay-roll  records.  The  total  should  then  be  analyzed  and  either 
charged  to  departments  or  included  in  the  general  operating 
expenses. 

Factory  clerks'  salaries  are,  as  a  rule,  shown  on  the  pay- 
roll records,  and  their  total  time  is  usually  chargeable  to  over- 


I90         DETAILED  FACTORY  REPORTS 

head.  However,  in  small  plants  where  one  set  of  clerks  di- 
vide their  work  between  the  financial  and  the  manufacturing 
ends  of  the  business,  only  that  portion  of  their  time  which  is 
properly  a  factory  expense  should  be  charged  to  overhead. 
The  distribution  may  be  based  on  an  estimate  of  the  time 
spent  on  each  class  of  work.  In  large  plants,  where  the  de- 
partments are  well  organized,  the  factory  clerks'  time,  in- 
cluding clerks  in  the  operating  departments  of  the  factory, 
stock  clerks,  pay-roll  clerks,  cost  department  clerks,  etc.,  is 
charged  directly  to  the  department  in  which  the  clerks  are 
employed.  In  this  way  their  salaries  are  absorbed  in  the  over- 
head and  distributed  to  the  product. 

The  salaries  of  the  employees  who  devote  their  time  to 
correcting  defects  in  the  product  and  to  experimental  work  are 
often  charged  to  a  separate  department  account  termed  "De- 
fective Work"  or  "Experimental  Work,"  which  is  treated  as 
non-productive.  In  large  manufacturing  plants,  instructions 
for  such  work  are  issued  upon  special  factory  orders.  When 
this  is  done  the  material  and  productive  labor  costs  of  each 
order  are  compiled  upon  a  separate  cost  sheet,  to  which  over- 
head is  added  in  accordance  with  the  method  of  distribution 
which  best  suits  the  conditions  of  work  in  the  department. 

After  the  total  cost  of  the  defective  or  experimental  work 
is  ascertained,  it  is  charged  to  Defective  Work  or  Experimental 
Work  account.  The  charges  thus  made  may  then  be  trans- 
ferred to  accounts  which  have  a  tangible  asset  value,  or  a 
portion  of  these  costs  may  be  absorbed  in  the  factory  over- 
head under  the  caption  of  "Defective  Work"  or  "Experimental 
Work,"  and  in  that  way  applied  to  the  cost  of  the  rest  of  the 
product  manufactured. 

Indirect  Expenses — Fixed  Charges 

It  should  be  noted  that  certain  items  of  overhead  such  as 
rent,  insurance,  taxes,  interest,  and  depreciation  are  more  or 


FACTORY  OVERHEAD  REPORTS 


191 


less  "fixed"  in  character.  These  are  so  termed  because  they 
are  incurred  whether  the  plant  is  operated  or  not.  Hence 
they  are  not  affected  by  the  volume  of  production  and  often 
the  same  amount  of  charge  is  incurred  each  period.  Provi- 
sion must  be  made  for  charging  these  items  to  production 
monthly  or  periodically,  depending  upon  whatever  cost  pe- 
riod is  estabhshed.  In  simple  cost  systems  this  can  be  done  by 
entries  at  the  end  of  each  cost  period.  In  some  instances  it  is 
quite  practicable  to  provide  for  recording  these  items  through 
the  purchase  records  or  register  of  accounts  payable,  but  in 
large  plants  where  departments  are  numerous,  considerable 
time  may  be  saved  by  the  preparation  of  schedules  of  fixed 
charges. 


SCHEDULE   OF   RENT   CHARGE 

For  the  year  19 

Accounts 

Monthly 
Charge 

Postings  to  Accounts 

Jan. 

Feb. 

Mar. 

Apr. 

Etc. 

Dr.  Cutting  Dept 

$150.00 

300.00 

350.00 

150.00 

50.00 

75.00 

75.00 

150.00 

200.00 

Machining  Dept 

Assembling  Dept 

Finishing  Dept 

Trimming  Dept 

Inspecting  Dept 

Packing  Dept 

Stock-Room  Dept 

Warehouse  Dept 

Cr.  Rent 

$1,500.00 

1 

Form  32.    Schedule  of  Fixed  Charges.     (Size,  8  x  5.) 


192 


DETAILED  FACTORY  REPORTS 


A  simple  schedule  of  rent  charge  is  illustrated  in  Form 
32,  on  which  a  single  entry  of  the  monthly  fixed  charge  may  be 
made  to  cover  the  whole  year.  A  check  mark  placed  in  the 
spaces  for  the  charges  affecting  each  department  each  month 
indicates  that  the  items  have  been  posted  to  their  proper  ac- 
counts. 

Maintenance,  Repairs,  and  Renewals 

The  method  of  recording  charges  for  maintenance,  re- 
pairs, and  renewals  depends  upon  the  size  of  the  plant  and  the 
organization  of  the  departments.  In  small  plants  repairs  and 
renewals  are  usually  made  upon  the  authority  of  standing 
factory  orders,  to  the  order  numbers  of  which  all  costs  for  re- 
pairs are  charged.  At  the  end  of  the  month  the  total  costs  of 
these  standing  orders  are  ascertained  and  charged  to  the 
Maintenance,  Repairs,  and  Renewals  account  kept  with  each 
department  of  the  plant.  In  this  manner  they  are  absorbed  in 
the  departmental  overhead. 

In  large  plants  the  cost  of  small  repairs  may  be  charged 
to  standing  order  numbers,  but  for  repairs  of  an  important 
character  special  factory  orders  are  issued.  The  direct  ma- 
terial and  direct  labor  cost  of  the  job  are  charged  to  the  cost 
sheet  of  the  particular  order  covering  the  special  repairs. 
When  the  work  is  completed,  the  overhead  on  the  job  is  added, 
after  which  the  total  cost  of  the  work  is  charged  to  the  Main- 
tenance, Repairs,  and  Renewals  account  of  the  department 
in  which  the  repair  has  been  made.  At  the  same  time  any 
departments  which  may  have  done  work  on  the  job  receive 
credit.  In  large  plants  a  mechanical  millwright  or  repair 
department  is  usually  organized  to  carry  out  all  repairs,  in 
which  case  credit  for  work  done  should  be  given  to  this  de- 
partment. 

The  question  often  arises  as  to  whether  it  is  correct  to 
include  overhead  as  part  of  the  maintenance,  repairs,  and  re- 


FACTORY  OVERHEAD  REPORTS  193 

newals  cost.  True  costs  consist  of  direct  material,  plus  direct 
labor,  plus  overhead.  Repair  work  must  be  supervised  and 
recorded,  machines  and  power  are  utilized,  and  space  in  the 
factory  is  also  necessary.  If  these  conditions  are  true,  certain 
items  of  overhead  necessarily  enter  into  the  repair  cost. 
Furthermore,  if  repairs  were  done  by  outside  contractors,  these 
contractors  in  arriving  at  the  amount  to  be  charged  for  the 
repair,  would  include  direct  material,  direct  labor,  overhead, 
and  also  a  margin  of  profit. 

Power  Expenses 

In  a  well-organized  factory  which  operates  its  own  power 
plant,  material  records  are  kept  showing  the  consumption  of 
the  various  materials  and  supplies  used  in  producing  power, 
from  which  are  compiled  the  charges  for  these  items.  The 
wages  of  the  power  plant  employees  also  are  charged  directly 
to  this  department  from  the  pay-roll  records,  as  well  as  the 
items  of  expense  distributed  to  the  power  plant  department  and 
a  proportion  of  the  general  operating  expenses.  After  the 
total  costs  of  the  power  plant  have  been  determined  in  this 
way,  they  are  distributed  to  the  operating  departments  in 
proportion  to  the  consumption  of  power  in  each.  The  record 
which  is  used  for  summarizing  this  information  is  often  termed 
the  "Power  Plant  Distribution  Record"    (Form  33). 

On  the  left  half  of  the  form  are  collected  and  summarized 
the  power  expenses  for  the  period.  The  total  of  these  divided 
by  the  horse-power  hours  (i.e.,  the  total  hours  of  running  time 
multiplied  by  the  horse-power  generated)  gives  the  unit  charge 
for  each  horse-power  hour.  On  the  right  half  of  the  form 
the  horse-power  and  the  operating  time  of  each  machine  are 
recorded  in  the  first  two  columns.  The  multiplication  of  these 
two  figures  gives  the  horse-power  hours  chargeable  to  each 
machine,  and  this  last  figure  multiplied  by  the  unit  charge  de- 
scribed above  gives  the  power  cost  of  each  machine. 


194 


DETAILED  FACTORY  REPORTS 


In  small  power  plants  it  is  difficult  to  record  the  con- 
sumption of  material  and  supplies,  and  in  such  case  it  may  be 
more  practicable  to  take  an  inventory  of  the  amounts  on  hand 
at  the  end  of  each  month.     If  this  is  done,  the  value  of  the 


POWER   PLANT   DISTRIBUTION 

For  the  period 

RECORD 

.  IQ 

'                                           1 

Analysis  of  Costs 

Distribution 

Details 

Amount 

Macune 

Dept. 

Horse- 
Power 

Operat- 
ing Time 

H.  P. 

Hours 

Power 
Cost 

Fuel 



1242 
1243 
1244 
1341 
1342 
1421 
1422 
1423 
1551 
1671 
1672 

A 
A 
A 
B 
B 
C 
C 
C 
D 
E 
E 

Water 

Oil  and  Supplies 

Engineer 



Rent 

Taxes  and  Licenses. .... 

Depreciation 

Repairs  and  Maintenance 

General  Operating  Elxp 

Total 

—:z 

Cost  per  H.  P.  Hour 

Totals 

1 

Form  33.    Power  Plant  Distribution  Record.     (Size,  8  x  5.) 

material  consumed  may  be  obtained  by  adding  to  the  inventory 
at  the  beginning  of  the  month  all  power  supplies  purchased 
during  that  month  and  subtracting  the  inventory  on  hand  at 
the  end  of  the  month.  This  simple  calculation  often  saves 
clerical  time  in  small  plants. 

Where  storeroom  accommodations  are  not  available,  ma- 
terials and  supplies  consumed  in  the  power  plant  may  be  esti- 
mated. Under  these  conditions  the  best  information  obtainable 
should  be  used,  and  the  estimated  figures  should  be  revised  by 


FACTORY  OVERHEAD  REPORTS  195 

taking  the  actual  inventory  of  the  materials  and  supplies  on 
hand  at  different  times  during  the  year. 

Freight  and  Cartage  Inward 

When  freight  and  cartage  inward  are  treated  as  overhead, 
a  freight  analysis  sheet  should  be  used  for  compiling  the 
charges  to  departments.  This  record,  which  need  not  be  il- 
lustrated, is  a  simple  columnar-ruled  sheet  so  headed  as  to 
show  the  charges  as  they  affect  the  different  departments. 

In  small  plants  freight  and  cartage  inward  is  charged 
directly  to  one  account  which  is  closed  out  to  general  operating 
expenses  and  in  that  manner  distributed  to  departments.  In 
large  plants  the  freight  and  cartage  inward  is  usually  charge- 
able in  different  ways;  part  of  it  may  be  added  to  the  material 
cost,  a  portion  absorbed  in  the  total  cost  of  the  new  equipment 
purchased,  and  the  balance  included  as  part  of  the  factory  over- 
head. Where  this  balance  represents  a  large  amount,  provision 
should  be  made  for  its  distribution  either  to  departments  or  to 
the  products  manufactured.  In  most  cases  it  is  not  necessary  to 
design  special  forms  for  the  distribution  or  analysis  of  freight 
charges,  as  an  ordinary  columnar  sheet  serves  the  purpose. 

Over,  Short,  and  Damage 

This  item  of  overhead  is  obtained  from  special  factory 
reports.  Where  material  is  subject  to  shrinkage  at  the  time  of 
purchase,  provision  should  be  made  upon  the  report  of  ma- 
terial received  for  recording  any  loss  in  weight  or  quantity. 
When  shrinkage  or  damage  takes  place  during  the  processes 
of  manufacture,  a  separate  departmental  material  report,  or 
the  production  report,  may  be  used  for  the  purpose  of  inform- 
ing the  cost  department  office.  Increase  in  weight  of  ma- 
terial should  also  be  reported  in  order  that  provision  may  be 
made  in  the  office  for  changes  as  to  quantity  produced  when 
summarizing  the  costs. 


196         DETAILED  FACTORY  REPORTS 

Reports  showing  overs,  shorts,  or  damages  should  be  de- 
signed to  suit  the  special  needs  of  each  case  so  that  the  charges 
affecting  the  departments  may  be  obtained. 

Distribution  or  Analysis  Record 

When  collecting  the  items  of  factory  overhead  it  will  be 
found  that  many  of  them  can  be  obtained  from  incoming  in- 
voices, which  are  analyzed  by  means  of  the  purchase  record, 
accounts  payable  vouchers,  or  the  register  of  accounts  payable. 

For  the  purpose  of  showing  a  more  detailed  analysis  of 
expenses,  the  purchase  record,  or  register  of  accounts  pay- 
able, is  supplemented  by  a  "Distribution  Record"  or  "Anal- 
ysis of  Expense  Record,"  the  purpose  of  which  is  explained 
by  its  name.  The  record  provides  columns,  or  separate  sheets, 
for  compiling  the  various  detailed  items  which  should  be 
charged  to  the  accounts,  showing  the  classification  of  the 
items  composing  the  factory  overhead  expenses.  A  consider- 
able portion  of  the  factory  overhead  items  is  thereby  obtained 
from  the  distribution  record  at  the  time  the  invoices  are  en- 
tered in  the  purchase  records. 

The  items  of  overhead  not  found  on  the  purchase  records 
are  taken  from  the  records  previously  mentioned,  such  as  the 
summary  of  material  requisitions,  the  summary  of  depart- 
mental materials  used,  the  analysis  of  labor  reports,  fixed 
schedules,  and  special  distribution  reports,  such  as  power  plant 
reports,  freight  analysis,  summary  of  repair  orders,  and  de- 
fective and  experimental  work  accounts. 

Deferred  Expense  Record 

In  every  plant  expenses  are  incurred  which  are  only  in 
part  appHcable  to  the  current  cost  period.  Items  of  this  char- 
acter would  include  large  repairs,  insurance,  prepaid  taxes  and 
interest,  experimental  work  for  the  benefit  of  future  opera- 
tions, and  purchases  of  stationery  and  miscellaneous  supplies. 


FACTORY  OVERHEAD  REPORTS 


197 


As  only  part  of  these  items  or  expenses  are  consumed  during 
the  current  month,  provision  should  be  made  for  distribu- 
ting them  over  several  months'  operations.  To  this  end  such 
expenditures  should  be  charged  to  a  suitably  named  deferred 
expense  account  which  is  credited  at  the  end  of  each  period 
with  the  portion  of  the  charge  applicable  to  the  current  period. 
If  the  items  of  this  character  are  numerous,  a  "Deferred 
Charges"  account  may  be  used  to  control  a  subsidiary  record 
in  which  the  details  of  the  deferred  items  would  be  shown. 

Summary  of  Factory  Overhead  Reports 

Form  34  summarizes  the  records  and  reports  used  for 
the  purpose  of  collecting  and  distributing  the  items  of  factory 
overhead. 


Factory 

Overhead 

Reports 


Indirect  Material 
Indirect  Labor 
Fixed  Charges 
Repairs  and  Renewals 
Power,  Light,  and  Heat 
Freight  and  Cartage  Inward 
Over,  Short,  and  Damage 


fMaterial  Requisition 
\Material  Reports 

Labor  Reports 

•  Pay-Roils 
Special  Reports 

Fixed  Schedules 

Cost  Sheets 

•  Material  Reports 
Labor  Reports 

fPower  Distribution 
\Power  Plant  Report 

rinvoices 
\Freight  Analysis 

Special  Factory  Reports 


Form.  34.    Classification  of  Factory  Overhead  Reports 


CHAPTER  XIII 

METHODS  OF  REPORTING  PRODUCTION 

Purpose  of  a  Production  Report 

As  explained  in  Chapter  V,  a  factory  order  is  the  notifica- 
tion to  the  production  departments  to  commence  work  upon 
a  job,  order,  or  article,  the  progress  on  which  is  shown  by 
means  of  detailed  material  and  labor  reports.  Another  im- 
portant link  in  the  cost  records  is  the  production  report  (Form 
35).  This  is  a  form  used  for  the  purpose  of  notifying  the 
office  that  the  work  on  a  particular  job,  order,  or  article  has 
been  completed,  and  that  the  product  is  ready  either  for 
shipment  or  to  be  stored  in  one  of  the  various  stock-rooms 
of  the  plant.  The  production  order  starts  the  manufacture  of 
the  product,  while  the  production  report  records  quantity  pro- 
duced. 

Form  of  Production  Report 

There  are  many  kinds  of  production  reports,  the  form 
of  each  and  the  kind  of  information  furnished  depending  upon 
the  use  to  which  it  is  put  and  the  method  of  cost-finding  em- 
ployed in  that  particular  case.  In  general,  however,  these 
reports  may  be  classified  as  follows: 

1.  Simple  production  reports  without  provision  for  re- 

cording costs. 

2.  Simple  production  reports,  provision  being  made  for 

recording  costs. 

3.  Factory  orders  used  as  production  reports. 

4.  Material  reports  used  as  production  reports. 

5.  Labor  reports  used  as  production  reports. 

198 


METHODS  OF  REPORTING  PRODUCTION 


199 


Simple  Production  Reports 

Form  35  illustrates  the  simplest  form  of  production  re- 
port. It  is  prepared  at  the  end  of  each  day  by  the  operating 
departments   and  provides   for   showing  the  order  number, 


DAILY   PRODUCTION   REPORT 

Department 

No 

Date 

Order  No. 

Quantity 

Description 

>>^^XV.''^^>-'-N.^X.V>X«»XX<'>,*'^*^^>.^^^V,'^^^^-^^-N^.>^-^^S^^^N^V^S<~- 

Approved  by 

Posted  to  Stock  Records. 

Posted  to  Summaries 

Posted  to  Cost  Sheet 


Prepared  by.. 


Form  35.    Daily  Production  Report — Simple  Form.    (Size  8  x  11.) 

quantity,  and  description  of  the  work  completed.  It  is  num- 
bered and  dated,  the  number  being  placed  upon  it  in  advance 
so  that  it  may  be  known  whether  or  not  all  reports  are  re- 
ceived at  the  office.  The  quantity  column  is  used  for  the  pur- 
pose of  showing  the  partial  completion  of  a  production  order 


200  DETAILED  FACTORY  REPORTS 

when  this  covers  the  manufacture  of  a  large  number  of  articles 
requiring  several  days  or  possibly  weeks  for  their  comple- 
tion. 

It  should  be  noted  that  the  form  shown  does  not  provide 
space  for  recording  costs.  If  necessary,  columns  may  be 
added  to  show  total  cost  as  well  as  the  details  of  the  material, 
labor,  and  overhead  costs  of  departments.  If  this  is  done,  the 
signature  of  the  person  checking  the  production  report  and 
entering  the  costs  should  be  placed  at  the  bottom  of  the  form ; 
also  the  person  who  proves  the  mathematical  accuracy  of  the 
figures  should  sign  the  report  as  evidence  that  the  work  has 
been  checked  before  the  costs  are  transferred  to  the  summary 
record. 

If  the  order  method  of  cost-finding  is  used,  the  question 
arises  as  to  the  necessity  of  entering  a  description  of  each 
order  on  the  production  report.  In  view  of  the  fact  that  er- 
rors in  reporting  order  numbers  are  apt  to  be  made,  the  entry 
of  a  description  provides  a  means  for  identifying  the  order 
and  thereby  eliminates  the  possibility  of  error.  If  the  order 
numbers  reported  could,  however,  be  relied  upon,  a  production 
report  might  take  the  form  of  a  list  of  these  numbers  showing 
the  work  completed  each  day. 

Under  the  process  method  of  cost-finding,  the  same  sim- 
ple forms  may  be  used  if  numbers  are  assigned  to  definite 
units  of  production,  even  though  the  costs  are  compiled  for 
processes.  If  the  volume  of  production  is  not  specified  before- 
hand, it  is  not  necessary  to  designate  the  completed  product 
by  means  of  a  number;  the  quantity  and  description  of  the 
articles  produced  suffice.  If  detailed  costs  are  required  and 
provision  is  made  for  recording  them,  an  additional  total  cost 
column  should  also  be  provided  for  the  purpose  of  proving  the 
mathematical  accuracy  of  the  figures.  The  total  of  the  ma- 
terial, labor,  and  overhead  columns  would  then  equal  the 
amount  entered  in  the  total  cost  column. 


METHODS  OF  REPORTING  PRODUCTION  201 

Production  Reports  Showing  Progress  of  Product 

Production  reports  which  show  department  costs  may  be 
used  for  the  purpose  of  crediting  the  operating  departments 
when  work  is  transferred  from  one  department  to  another. 
When  one  department  is  credited,  either  another  department  or 
the  stock-room  account  should  be  debited,  depending  upon  the 
disposition  of  the  product.  In  this  connection  it  should  be  re- 
membered that  material  in  process  is  usually  transferred  from 
one  operating  department  to  another,  while  finished  or  partly 
finished  product  may  be  stored  as  manufactured  parts  or 
finished  parts  stock,  or  may  be  immediately  shipped ;  or  finally, 
some  of  the  finished  parts  may  be  sent  to  the  raw  material 
stock-room  to  be  again  requisitioned  for  the  manufacture  or 
assembly  of  the  finished  product. 

To  avoid  undue  clerical  work  in  factory  departments, 
in  many  cases  the  disposition  of  the  processed  material  is  not 
shown  upon  the  production  reports,  especially  when  factory 
routine  is  standardized  and  cost  clerks  can  ascertain  the  dispo- 
sition of  the  product  by  referring  to  standard  practice  sched- 
ules. Under  conditions  where  this  is  not  practicable,  it  may 
be  necessary  to  provide  columns  on  the  production  report  to 
show  the  disposition  of  the  processed  material  or  the  manu- 
factured product. 

Factory  Orders  as  Production  Reports 

The  factory  order  may  also  be  used  as  a  production  re- 
port, the  return  of  the  order  to  the  office  after  the  work  has 
been  completed  constituting  a  notification  of  this  completion. 
The  duplicate  departmental  copies  are  often  used  for  this 
purpose,  each  department  turning  in  its  own  copy  of  the  order 
as  soon  as  its  part  of  the  work  is  finished.  These  notifications 
furnish  the  data  for  preparing  a  production  summary,  and 
copies  of  the  factory  orders  used  in  this  way  are  virtually  pro- 
duction reports. 


202  DETAILED  FACTORY  REPORTS 

Tag  and  Coupon  System  of  Production  Report 

A  production  order  in  the  form  of  a  tag,  giving  a  de- 
scription, quantity  to  be  manufactured,  and  order  number  is 
sometimes  attached  to  the  material  itself  or  to  a  container 
which  holds  the  material.  The  tag  accompanies  the  goods 
through  the  processes  of  manufacture  until  they  are  completed, 
when  it  is  sent  to  the  office  as  a  notification  of  completion,  thus 
constituting  a  production  report.  The  tag  system  is  sometimes 
developed  to  show  the  quantities  transferred  from  one  depart- 
ment to  another.  When  this  is  done,  columns  should  be  ruled 
on  the  tag  to  show  the  movements  by  departments  of  the  quan- 
tity received,  by  whom  received,  date  received,  quantity  pro- 
duced, and  date  transferred.  This  provides  a  means  for  keep- 
ing track  of  the  flow  of  materials  between  departments,  and 
for  placing  responsibility  when  discrepancies  arise  or  mate- 
rial is  lost  in  transit. 

To  illustrate  the  operation  of  the  tag  system,  it  may  be 
assumed  that  in  the  cutting  department  of  a  garment  factory 
an  entry  is  made  upon  the  production  tag  showing  that  the 
material  for  a  dozen  garments  has  been  cut.  When  the  ma- 
terial is  transferred  to  the  sewing  department  the  forewoman 
of  this  department  signs  for  its  receipt  on  the  tag,  and  when 
the  tag  leaves  this  department  together  with  the  finished  gar- 
ments for  which  the  material  is  used,  an  entry  is  made  upon  it 
showing  that  one  dozen  sewed  garments  are  sent  to  the  rib- 
boning department  where  the  receipt  is  again  signed  for.  In 
this  way  the  tag  or  ticket  follows  the  order  through  the  operat- 
ing departments  until  the  goods  are  completed  and  the  stock- 
room or  shipping-room  clerk  signs  for  their  receipt.  It  is  then 
sent  to  the  office  where  it  constitutes  the  production  report. 

Under  complex  manufacturing  conditions,  the  tag  system 
may  be  further  developed  by  the  use  of  coupons  which  enable 
the  production  report  to  be  prepared  in  the  office  in  advance. 
The  stub  to  which  the  coupons  are  attached  shows  the  order 


METHODS  OF  REPORTING  PRODUCTION  203 

number,  description  of  the  work,  date  started,  date  to  be  com- 
pleted, and  so  on.  The  coupons  themselves  provide  spaces 
for  recording  the  order  number  shown  upon  the  stub,  the 
coupon  number,  and  the  quantity  produced,  both  good  and 
defective.  Each  coupon  represents  one  or  a  series  of  manu- 
facturing operations,  so  that  when  detached  and  sent  to  the 
office  as  the  various  operations  are  completed,  they  provide 
information  as  to  the  progress  of  production. 

After  all  coupons  have  been  received  at  the  office,  tHe 
stub  is  sent  with  the  goods  to  the  stock-room  or  shipping  de- 
partment, a  signature  on  the  stub  being  required  at  this  point 
to  certify  that  the  quantity  received  is  correct.  Emphasis  must 
be  placed  upon  the  importance  of  this  check  upon  the  quantity 
at  the  point  where  the  articles  are  shipped  or  stored.  The 
stock-keeper  or  shipping  clerk  may  either  make  out  a  separate 
report  or  sign  the  production  stub  as  explained  above,  but 
unless  the  quantity  designated  on  the  production  report  tallies 
with  the  quantity  shipped  or  taken  into  stock,  unit  costs  can- 
not be  accurately  ascertained.  After  the  production  stub  has 
been  receipted,  it  is  returned  to  the  office  where  the  summary 
of  production  prepared  from  the  miscellaneous  coupons  is 
compared  with  the  data  entered  on  the  stub. 

An  advantage  of  the  coupon  over  the  simple  form  of 
tag  is  that  it  enables  work  in  progress  to  be  readily  traced  by 
looking  up  the  last  coupon  received  in  the  office  and  noting 
from  which  department  it  was  sent.  In  designing  coupons 
care  should  be  exercised  to  see  that  the  order  of  the  operations 
is  reversed,  so  that  the  first  coupon  to  be  detached  (the  bottom 
one)  represents  the  first  operation  and  the  last  coupon  the  last 
operation. 

Material  Reports  as  Production  Reports 

Under  some  conditions  of  manufacturing,  material  re- 
ports may  also  serve  the  purpose  of  production  reports.    This 


204 


DETAILED  FACTORY  REPORTS 


is  especially  true  in  manufacturing  industries  where  a  fixed 
formula  is  used  for  a  definite  quantity  of  product.  As  an  il- 
lustration, in  the  manufacture  of  chemicals,  or  paints  and  var- 
nishes, the  formulae  are  fixed  as  to  kind  and  quantity  of  ma- 
terials required  to  produce  a  certain  yield.  Under  these  con- 
ditions the  material  report,  or  the  bill  of  material  which  serves 
as  a  requisition  for  raw  materials,  may  also  serve  the  purpose 
of  a  production  report  when  returned  to  the  office.  A  special 
production  report  is  then  unnecessary,  as  the  insertion  of  addi- 
tional spaces  for  quantity  produced,  date  transferred  to  stock, 
and  signature  showing  its  receipt  are  sufficient  for  the  pur- 
pose. Material  reports  may  be  used  in  this  way  under  both 
the  order  and  process  methods  of  cost-finding. 

Labor  Reports  as  Production  Reports 

Where  a  piece-rate,  bonus,  or  premium  plan  of  paying 
wages  is  used,  the  labor  reports  of  the  employees  may  be  de- 
signed to  serve  as  production  reports.  When  this  is  done,  a 
thorough  check  of  the  quantity  produced  is  essential,  and  an  in- 
spector's O  K  should  be  placed  upon  individual  labor  tickets  to 
signify  that  the  articles  have  been  counted  and  inspected  and 
that  the  quantity  reported  has  been  actually  produced.  In 
some  industries  the  labor  tickets  are  made  up  in  coupon  form, 
the  return  of  the  coupons  to  the  office  signifying  that  definite 
quantities  of  articles  have  been  produced.  This  method  of  re- 
porting production  by  means  of  the  labor  reports  is  applicable 
to  both  the  order  and  process  methods  of  cost-finding. 

Defective  Work  Reports 

A  defective  work  report  (Fonn  36)  is  a  specialized  form 
of  production  report,  the  purpose  of  which  is  to  report  any 
defects  in  the  product  discovered  during  the  process  of  manu- 
facture. The  office  should  be  notified,  of  these  defects  so  that, 
if  possible,  they  may  be  corrected  and  the  product  made  sal- 


METHODS  OF  REPORTING  PRODUCTION 


205 


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206  DETAILED  FACTORY  REPORTS 

able;  if  this  cannot  be  done,  the  defective  product  must  be 
scrapped  and  disposed  of  in  some  other  way.  If  there  is  any 
rivalry  between  operating  departments  as  to  which  can  make 
the  best  record  and  the  foremen  of  all  operating  departments 
receive  copies  of  the  summary  of  defective  work,  it  will  tend 
strongly  to  lessen  losses  from  this  cause. 

Spaces  may  be  provided  on  the  report  for  showing  the 
date  and  the  cost  of  correcting  defective  work.  Under  some 
conditions  this  cost  may  be  charged  to  the  cost  of  the  particular 
job  or^ order  of  which  it  is  a  part;. under  other  conditions  it 
may  be  charged  to  a  departmental  overhead  account,  and  in 
that  manner  absorbed  in  the  overhead.  Whenever  it  is  pos- 
sible to  use  some  of  the  material  again,  it  should  be  taken  back 
into  the  Materials  account  at  its  scrap  value  and  the  difference 
in  cost  charged  to  a  Defective  Work  account. 

Time  of  Reporting  Production 

Production  should  be  reported  to  the  office  as  promptly 
as  necessity  demands.  Often  time  is  lost  and  sometimes  ma- 
terial, operating  departments  become  congested,  and  deliver- 
ies cannot  be  made  promptly,  because  prompt  and  adequate 
production  records  are  not  available.  In  large  manufacturing 
plants  a  tracing  department  sometimes  reaches  an  exaggerated 
size  for  the  reason  that  the  information  given  on  production 
reports  is  inadequate  and  production  is  not  reported  on  time. 
A  thorough  system  of  reports  would  provide  the  office  with  all 
the  necessary  information  for  answering  questions  and  tracing 
jobs,  orders,  or  articles  through  the  various  operations. 

Local  conditions  would  govern  the  time  of  reporting  pro- 
duction, but  under  ordinary  circumstances  production  should 
be  reported  daily;  that  is,  no  reports  should  be  allowed  to 
accumulate  in  the  factory  and  held  there  to  be  summarized  at 
the  end  of  the  period,  when  the  original  records  could  be  sent 
to  the  office  in  the  forrn  of  a  daily  report^ 


METHODS  OF  REPORTING  PRODUCTION 


207 


Disposition  of  Product 

The  product  may  be  disposed  of  in  various  ways;  it  may 
be  shipped  at  once  to  the  customer  or  taken  into  stores  as  manu- 
factured parts,  part-finished  stock,  or  finished  stock.  If  defec- 
tive, it  may  be  returned  to  the  operating  departments  for  the 
purpose  of  having  the  defects  corrected.  If  it  is  for  "home 
use"  and  in  the  nature  of  machinery,  tools,  and  miscellaneous 
equipment,  it  may  be  transferred  to  plant  asset  accounts. 

The  disposition  of  the  product  should  be  accurately  indi- 
cated by  means  of  reports  so  that  the  charges  may  be  passed 
to  the  proper  accounts.  A  production  report  is  a  notification 
that  a  particular  department  claims  credit  for  work  done,  and 
when  this  credit  is  entered,  an  offsetting  charge  must  be  made 
to  another  account.  When  a  standard  product  is  manufac- 
tured for  stock,  the  stock  account  must  be  debited.  Where 
goods  are  made  for  special  order  and  the  finished  product  is 
shipped,  this  simplifies  the  accounting  for  the  credits  and 
charges.  In  large  plants  where  the  production  system  is  com- 
plex, definite  instructions  covering  the  disposal  of  the  product 
should  be  given  to  each  operating  department  if  cost  informa- 
tion is  to  be  accurately  recorded.  It  is  often  practicable  to 
indicate  this  by  the  color  of  the  report. 

Procedure  in  Handling  Production  Reports 

The  procedure  in  handling  production  reports  may  be 
indicated  as  follows :  preparation,  examination,  recording,  dis- 
position, and  filing.  The  reports  may  be  prepared  by  a  clerk 
in  the  cost  department,  or  by  the  factory  foreman  or  his  clerk. 
Before  they  are  sent  to  the  office  they  should  bear  the  approval 
of  the  factory  superintendent,  production  manager,  or  some 
other  responsible  person.  Whether  they  are  delivered  to  the 
office  by  the  factory  clerk,  or  collected  by  a  messenger  on  his 
rounds,  is  immaterial  provided  they  reach  the  office  at  regular 
stated  intervals. 


208 


DETAILED  FACTORY  REPORTS 


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METHODS  OF  REPORTING  PRODUCTION  209 

When  the  reports  are  examined  in  the  office  for  their  cor- 
rectness, care  should  be  exercised  to  see  that  the  proper  order 
numbers  are  given  and  that  the  descriptions  are  sufficient  to 
identify  the  orders  in  case  of  necessity.  The  examination 
should  also  disclose  whether  the  reports  are  properly  dated, 
numbered,  and  signed,  so  that  the  responsibility  of  the  person 
making  or  approving  them  is  fixed. 

If  the  reports  provide  spaces  for  recording  costs,  the  de- 
tails of  these  would  be  obtained  from  the  cost  sheets  or  other 
cost  records.  If  costs  are  recorded  on  the  reports,  provision 
must  be  made  for  ascertaining  the  total  material,  labor,  and 
overhead  costs  to  be  credited  to  the  departmental  accounts. 
This  work  should  be  arranged  so  as  to  permit  of  a  proof  being 
made  of  the  accuracy  of  the  calculations. 

The  disposition  of  the  product  will  indicate  the  offsetting 
debit  to  the  above  credit — either  a  charge  to  a  stock  account, 
an  expense  account,  or  a  plant  asset  account,  as  the  case  may 
require.  A  mathematical  proof  should  also  be  established  for 
this  portion  of  the  work.  The  completed  and  semi-finished 
product  taken  into  stock  should  be  entered  upon  the  records  of 
the  stock-room  in  which  it  is  stored.  These  postings  should 
be  made  promptly  each  day  and  should  be  kept  up  to  date  so 
that  a  perpetual  inventory  of  each  item  of  stock  is  available. 

Production  reports  may  be  filed  in  various  ways — accord- 
ing to  the  dates  of  the  reports,  the  numbers  of  the  reports,  or 
the  numbers  of  the  departments  from  which  they  are  received. 
In  considering  the  method  of  filing,  the  main  point  is,  of  course, 
to  be  sure  that  ready  reference  can  always  be  made  to  the  orig- 
inal source  of  information. 

Summary  of  Production  Reports 

Form  2^J  summarizes  the  detailed  items  to  be  considered 
in  the  routine  of  production  and  the  devising  of  production 
reports. 


Part    III — Compiling    and    Summarizing    the    Cost 

Records 


CHAPTER  XIV 
COST  SHEETS 

Scope  of  Cost  Sheet 

After  the  material,  labor,  and  overhead  costs  are  ob- 
tained from  the  detailed  factory  reports,  provision  must  be 
made  for  bringing  the  elements  of  cost  together.  The  cost 
sheet  on  which  the  total  cost  of  the  job,  order,  or  article,  or 
process  is  compiled  serves  this  purpose.  The  record  thus  fur- 
nishes the  basis  for  charging  the  stock  accounts  with  the  cost 
of  the  finished  product  as  reported  by  the  operating  depart- 
ments and  for  establishing  a  correct  selling  price. 

Cost  sheets,  often  known  by  such  terms  as  "Cost  Cards," 
"Cost  Records,"  "Job  Cost  Tickets,"  "Order  Cost  Records," 
"Process  Cost  Records,"  etc.,  may  take  the  form  of  either 
loose-leaf  sheets  or  cards.  In  some  few  instances  they  are 
prepared  as  ledger  accounts  and  preserved  in  bound  book  form. 

Cost  sheets  are  used  to  gather  the  cost  of : 

1.  All  product  which  is  manufactured  and  sold. 

2.  AH  the  necessary  parts  thereof. 

3.  Machinery,  tools,  miscellaneous  equipment,  and  all 

other  items  of  a  permanent  value  constructed  for 
use  in  the  factory. 

4.  Repairs,    renewals,    betterments,    and    maintenance 

items,  which  are  chargeable  to  the  factory  over- 
head. 

211 


212  COMPILING  AND  SUMMARIZING  COSTS 

The  Job  or  Order  Cost  Sheet 

The  design  of  a  cost  sheet  to  meet  particular  needs  is  to 
some  extent  determined  by  the  method  of  cost-finding  in  use. 
When  costs  are  ascertained  by  jobs  or  articles  it  is  usually 
necessary  to  make  out  a  separate  cost  sheet  for  every  factory 
order  issued.  But  when  a  large  number  of  factory  orders 
are  issued  for  similar  products,  these  orders,  as  already  stated, 
may  often  be  conveniently  grouped  and  the  cost  obtained  for 
the  group.  This  eliminates  a  large  amount  of  detail  work  in- 
volved in  the  handling  of  each  order  separately.  However,  if 
the  cost  of  each  job  is  required  in  detail  so  that  comparisons 
may  be  made,  separate  cost  sheets  may  have  to  be  compiled  for 
each  order.  Another  reason  for  doing  this  is  to  insure  the 
accuracy  of  the  detailed  entries.  If  costs  are  compiled  on  cer- 
tain items  of  production  only,  the  factory  employees  may  dis- 
cover this  fact  and  in  consequence,  when  charging  material 
and  labor  on  the  detailed  reports,  may  enter  their  time  inaccur- 
ately to  jobs  which  they  know  are  not  being  checked  thor- 
oughly. 

The  Process  Cost  Sheet 

Under  the  process  method  of  cost-finding,  the  figures 
gathered  on  the  cost  sheets  cover  the  cost  of  each  process  over 
a  definite  period  of  time  which  may  or  may  not  conform  to  the 
regular  cost  period.  Thus,  the  process  cost  sheet  gives  the 
same  information  as  a  job  order  cost  sheet  regarding  the  mate- 
rial, labor,  and  overhead  costs,  the  only  difference  being  that 
the  record  relates  to  the  quantity  produced  during  a  definite 
period  of  time  and  not  to  a  given  and  predetermined  quantity 
of  production.  The  total  cost  shown  should  be  divided  by 
the  total  quantity  produced  to  ascertain  the  unit  process  cost, 
and  the  cost  of  the  various  processes  added  together  gives  the 
total  article  cost.  Form  38  illustrates  the  general  method  of 
summarizing  the  detailed  cost  of  a  particular  process.     While 


COST  SHEETS 


213 


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214  COMPILING  AND  SUMMARIZING  COSTS 

seemingly  complicated,  the  study  of  the  form  will  readily  make 
clear  the  method  of  summarizing  the  cost  of  the  process. 

Information  in  Heading 

In  the  heading  of  each  cost  sheet  should  appear  informa- 
tion as  to  which  order  the  costs  gathered  on  the  sheet  apply. 
Under  the  order  method  of  cost-finding,  complete  headings 
would  consist  of  the  following: 

1.  Name  of  customer. 

2.  Address  of  customer.  i 

3.  Customer's  order  number.  '  | 

4.  Instructions  as  to  delivery. 

5.  Date  work  is  required. 

6.  Name  and  description  of  article  to  be  manufactured, 

with    reference    to    blue-print    number,    drawing, 
sketch  number,  model  number,  or  correspondence. 

7.  Quantity  of  articles  to  be  manufactured.    • 

8.  Date  of  issuance  of  factory  order. 

9.  Date  to  be  completed. 
10.  Factory  order  number. 

The  information  entered  at  the  top  of  each  cost  sheet,  all 
or  part  of  which  may  be  essential,  is  obtained  from  the  copy 
of  the  factory  order  issued  to  the  operating  departments.  In 
fact,  these  headings  may  be  a  duplicate  carbon  copy  of  the 
factory  order,  the  details  of  which  are  taken  from  the  cus- 
tomer's original  order. 

The  preparation  of  the  headings  of  cost  sheets  may  be 
done  by  the  order  department  or  by  a  clerk  in  the  cost  depart- 
ment to  whom  are  sent  copies  of  all  factory  orders.  Different 
styles  of  cost  sheets  are  often  used  in  the  same  plant  for  gather- 
ing cost  information  on  the  various  articles  and  processes  as 
the  occasion  may  require;  therefore,  whoever  handles  the 
work  should  be  thoroughly  familiar  with  the  product  so  as 
to  know  exactly  what  kind  of  cost  sheet  to  prepare. 


COST  SHEETS  215 

Details  Shown  on  Cost  Sheets 

Though  the  uses  to  which  cost  sheets  are  put  are  more 
or  less  standardized,  the  amount  of  detail  entered  upon  them 
differs  greatly  under  diverse  conditions  of  manufacture.  In 
some  cases  all  that  may  be  required  are  the  figures  covering 
the  three  elements  of  cost.  In  other  cases  the  information  they 
contain  may  serve  as  a  means  of  controlling  the  work  in  proc- 
ess in  the  various  operating  departments.  In  this  connection 
they  may  be  considered  as  subsidiary  ledger  accounts  showing 
the  details  which  go  to  make  up  the  work  in  process  inventory 
— in  the  same  way  as  the  raw  stock  records  control  the  details 
of  the  raw  material  inventory. 

The  varying  amount  of  detail  which  cost  sheets  may  con- 
tain is  illustrated  by  the  following  enumeration: 

1.  Total  cost. 

2.  Total  material,  labor,  and  overhead  costs. 

3.  Departmental   material,   labor,   and   overhead  costs. 

4.  The  details  of  the  material,  labor,  and  overhead  costs 

in  each  department. 
'5.  Transfer  of  cost  from  one  department  to  another, 
provision  being  made  for  recording  the  total  cost 
up  to  and  including  previous  operations. 

Simple  Form  of  Cost  Sheet  i 

A  cost  sheet  in  its  most  simple  form  may  be  merely  a  tag 
or  a  ticket,  such  as  is  attached  to  the  merchandise  of  a  retail 
or  jobbing  concern,  giving  the  cost  and  selling  price  of  an 
article.  Such  a  tag  takes  on  the  mark  of  a  factory  cost  sheet 
when  the  cost  of  the  article  is  divided  into  three  elements  as 
shown  in  Form  39. 

Such  a  form  as  this  is  often  used  under  simple  conditions 
of  manufacture,  or  where  predetermined  or  estimated  costs 
(see  Chapter  XXVIII)  are  first  figured  and  entered  on  a  form 
to  be  compared  later  with  the  actual  production  figures. 


2l6 


COMPILING  AND  SUMMARIZING  COSTS 


Name  of  Article 

Material  Cost 

Labor  Cost 

Overhead  Cost 

Total  Cost 

Selling  Price 

Form  39.    Cost  Tag.     (Size,  2  x  3.) 

Departmental  Cost  Sheets 

Where  the  factory  is  departmentalized  it  is  necessary,  for 
administrative  purposes,  to  ascertain  costs  by  departments. 
Form  40  shows  the  elements  of  cost  in  this  way,  in  summa- 
rized form,  the  data  being  obtained  from  detailed  records. 

The  two  simple  forms  so  far  presented  are  used  either 


Name  of  Article                

Total 
Cost 

Dept. 
No.  I 

Dept. 
No.  2 

Dept. 
No.  3 

Dept. 

No.  4 

Material  Cost 

Labor  Cost 

Overhead  Cost 

Total  Cost 

1 

Form  40.    Departmental  Total  Cost  Sheet.     (Size,  8  x  3.) 


COST  SHEETS 


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2i8  COMPILING  AND  SUMMARIZING  COSTS 

under  conditions  where  costs  have  been  standardized,  esti- 
mated, or  predetermined,  or  where  a  summary  of  costs  is  de- 
sired. They  do  not  provide  for  the  postings  of  the  detailed 
material  and  labor  reports — a  necessary  procedure  in  the  rou- 
tine of  complete  cost-finding.  These  details  are  often  entered 
on  separate  departmental  cost  sheets,  to  which  overhead  is 
then  added  in  proportion  to  the  charge  in  each  department.  A 
departmental  record  of  this  character  is  shown  in  Form  41,  on 
which  the  postings  from  material  and  labor  reports  are  made 
directly. 

I 
Detailed  Summary  of  Costs 

When  it  is  practicable  to  show  the  details  of  cost  and 
their  summarization  by  departments  on  the  same  record,  there 
are  obvious  advantages  to  be  gained  by  thus  reducing  the 
number  of  forms.  The  use  of  such  a  cost  sheet,  however,  is 
only  feasible  when  the  kinds  of  raw  material  used  are  few  in 
number  and  when  the  labor  operations  are  comparatively 
simple.  These  conditions  are  usually  found  in  a  wood-work- 
ing plant  and  Form  42  which  is  used  in  this  industry  illustrates 
the  method  of  summarizing  the  details  of  cost  on  a  single 
sheet.  The  "summary  of  costs"  and  the  detail  of  the  "mate- 
rial costs"  are  gathered  on  one  side  of  the  sheet  and  the  detail 
of  the  "labor  costs"  on  the  other  side. 

A  study  of  Form  42  shows  that  its  ruling  provides  for 
summarizing  the  elements  of  cost  of  each  customer's  order  by 
departments  and  comparing  the  total  cost  after  freight  is  added 
with  the  list  price.  Into  the  method  of  recording  the  detail  of 
material  and  labor  costs  it  is  needless  to  enter.  The  point 
here  to  note  is  that  all  the  data  relating  to  the  cost  of  a  particu- 
lar article  are  entered  on  one  sheet  and  that  reference  thereto 
furnishes  any  detailed  information  that  may  be  required. 

When  the  kinds  of  material  used  in  manufacture  are 
numerous,  they  may  be  conveniently  printed  upon  the  form. 


COST  SHEETS 


219 


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COST  SHEETS  221 

Where  production  is  planned  and  routed  and  in  consequence 
the  sequence  of  operations  is  fixed,  details  as  to  labor  cost  may 
also  be  entered  upon  the  cost  sheet  in  advance.  In  compiling 
costs,  it  is  then  only  necessary  to  enter  the  figures  as  to  mate- 
rial and  labor  consumption  when  the  job  is  reported  finished  in 
the  various  operations. 

Progressive  Cost  Sheet 

Another  style  of  cost  sheet,  termed  a  "Progressive  Cost 
Sheet"  (Form  43),  is  used  where  the  figures  are  carried  from 
one  department  to  another  until  the  final  costs  are  obtained. 
A  separate  record  is  employed  for  each  operating  department. 
In  the  first  department  no  record  is,  of  course,  made  under  the 
heading  "Previous  Operations,"  but  all  the  other  columns  are 
used.  The  material  and  labor  costs  are  obtained  from  the 
detailed  material  and  labor  reports,  and  provision  is  made  for 
entering  the  indirect  costs,  depending  upon  the  method  of  over- 
head distribution  in  use.  The  production  of  the  department  is 
shown  and  provision  is  also  made  for  showing  the  total  cost. 
When  the  work  progresses  to  the  next  department,  the  cost  of 
the  previous  operations  is  transferred,  and  so  on  cumulatively 
through  the  operating  departments. 

Schedules  of  Estimated  Costs 

In  industries  where  the  product  is  of  small  intrinsic  value 
or  where  a  large  variety  of  articles  are  manufactured  which 
differ  one  from  another  only  in  unimportant  details,  it  is  often 
impracticable  to  ascertain  the  cost  of  each  kind  or  style  of  ar- 
ticle separately.  In  such  cases  the  article  cost  is  carefully 
estimated  in  advance  of  its  manufacture ;  a  number  of  articles 
which  are  similar  in  their  style  or  design  are  grouped ;  and  the 
costs  for  the  groups  are  then  ascertained  and  compared  with 
the  estimated  figures  as  a  means  of  checking  the  cost  of  produc- 
tion.    This  method  of  cost-finding  is  explained  in  detail  in 


222 


COMPILING  AND  SUMMARIZING  COSTS 


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223 


Chapter  XXVIII.  For  the  present  all  that  it  is  necessary  here 
to  note  is  that  when  costs  are  predetermined  in  this  way  the 
cost  sheet  takes  the  form  of  "Calculation  Blank"  or  "Estimated 
Cost  Schedule"  and  is  known  as  such.  These  differ  in  their 
form  and  general  style,  varying  from  a  simple  statement  of 
material  and  labor  cost  to  an  elaborate  schedule  showing  the 
details  of  all  costs. 

Form  44  illustrates  a  calculation  blank  used  in  a  garment 
factory.     In  making  up  the  estimates  the  figures  are  based 


CALCULATION   BLANK 

Article Style  No.. 

Description 


Material  Costs: 

Cloth 

Cloth 


Trimmings 

Trimmings 

Ribbons 

Labor  Costs: 

Cutting 

Sewing 

Trimming 

Finishing 

Inspecting 

Pressing  and  Boxing. 
Overhead  Costs 


Total 

Selling  Price. 


Approved  by Prepared  by.. 


Form  44.  Calculation  Blank  Used  in  Garment  Factory.  (Size,  6x11.) 


224  COMPILING  AND  SUMMARIZING  COSTS 

upon  the  opinion  of  either  the  designers  of  the  garment,  or  that 
of  the  factory  foremen  and  other  supervisors.  It  will  be  noted 
that  the  estimates  are  prepared  for  the  quantity,  kind,  and  price 
of  material,  the  time,  amount,  and  kind  of  labor,  and  the  over- 
head. In  this  way  a  selling  price  can  be  determined  in  ad- 
vance of  manufacture. 

Standard  costs,  where  these  have  been  established,  may 
also  be  used  in  making  up  the  estimates.  The  information 
entered  on  the  cost  sheet  then  serves  as  a  means  of  checking  or 
comparing  the  current  with  the  former  costs  of  production. 

Posting  Cost  Information 

In  entering  up  the  cost  sheets  the  transfers  of  entries  from 
factory  orders  and  labor  and  material  reports  oi  summaries 
may  be  termed  "posting"  and  would  include  the  following: 

1 .  Entering  the  data  in  the  heading  on  the  cost  sheet. 

2.  Posting  material  reports. 

3.  Posting  labor  reports. 

4.  Entering  overhead  costs. 

5.  Entering  quantities. 

Posting  Material  Reports 

The  postings  of  material  costs  consist  of  the  transfer  of 
the  information  shown  by  the  detailed  material  reports  so  as 
to  ascertain  the  total  material  cost  of  the  article  manufac- 
tured. In  posting  this  information,  all  or  part  only  may  be 
transferred  from  material  reports.  In  some  cases  an  entry  of 
the  date,  material  report  number,  and  cost  of  material  will 
suffice,  the  material  reports  themselves  being  attached  to  the 
cost  sheet  and  filed  with  it.  Often,  in  printing  establishments 
for  example,  the  cost  sheet  takes  the  form  of  an  envelope  in 
which  the  detailed  reports  are  inserted,  a  summary  of  the  total 
cost  appearing  on  the  outside  of  the  envelope. 


COST  SHEETS  225 

Where  it  is  necessary  to  post  complete  information  as  to 
material  costs  on  the  cost  sheets,  the  data  should  include : 

1.  Date  of  material  report 

2.  Material  report  number 

3.  Detailed  description  of  material  used 

4.  Cost  of  material  used 

The  above  data  would  be  gathered  from  material  requisi- 
tions, bills  of  material,  departmental  material  reports,  material 
transferred  reports,  credits  for  materials  returned  to  stock- 
room, and  any  other  specialized  material  reports. 

Posting  Labor  Reports 

As  in  the  case  of  material  postings,  the  postings  of  labor 
costs  may  include  part  or  all  of  the  following  information 
shown  upon  the  labor  reports : 

1.  Date 

2.  Operator's  number  and  name 

3.  Time  worked 

4.  Quantity  produced 

5.  Labor  cost 

Where  the  labor  is  constantly  changing,  it  may  prove  ad- 
vantageous to  have  the  names  of  employees  appear  upon  the 
cost  sheets  in  addition  to  their  numbers.  If  an  envelope  form 
of  cost  sheet  is  used,  a  summary  of  the  labor  cost  may  be  en- 
tered upon  the  outside  of  the  envelope  and  the  labor  reports 
filed  inside.  In  instances  where  the  overhead  distribution  is 
based  upon  time,  the  total  hours  worked  on  the  job  or  process 
must  be  recorded.  To  sum  up,  the  conditions  in  each  case 
must  determine  the  precise  data  to  be  entered  on  the  cost  sheet. 

Entering  Overhead  Costs 

In  all  cases  provision  should  be  made  for  entering  on  the 
cost  sheet  the  overhead  or  special  expenses  applicable  to  the 


226  COMPILING  AND  SUMMARIZING  COSTS 

job,  order,  or  article  to  which  each  form  relates.  If  the  over- 
head rates  are  fixed,  overhead  costs  may  be  added  as  soon  as 
the  work  is  completed  in  each  department.  Where  the  rates 
fluctuate,  it  may  be  necessary  to  postpone  the  overhead  cost 
entries  until  the  rates  are  obtained  at  the  end  of  the  cost  period. 
Overhead  costs,  as  a  rule,  appear  only  upon  the  summary  of 
costs. 

Under  the  process  method  of  cost-finding,  and  where  the 
machine  rates  for  distributing  the  overhead  are  established  and 
these  machine  rates  include  the  labor  cost,  the  labor  and  over- 
head costs  are  combined  and  appear  as  a  combined  amount 
upon  the  process  cost  records. 

Entering  Quantities 

The  cost  sheet  should  always  show  the  quantities  pro- 
duced in  each  operation  or  process.  This  information  is  ob- 
tained from  either  the  labor  reports  or  production  reports  of 
the  factory  departments.  It  is  essential  to  keep  account  of 
these  quantities,  as  leaks  of  material  can  be  discovered 
promptly  only  when  this  information  is  properly  posted.  Cost 
information  is  of  value  only  when  it  is  kept  up  to  date.  Too 
much  stress  cannot  be  laid  upon  the  fact  that  all  detailed  re- 
ports should,  where  possible,  be  posted  daily. 

Mechanical  Aids  for  Posting  Costs 

The  posting  of  data  to  cost  sheets  entails  much  clerical 
labor  which  may  often  be  saved  by  using  a  tabulating  machine 
of  some  kind.  Under  certain  conditions,  and  when  a  cost 
system  necessitates  a  large  amount  of  posting,  one  or  more  of 
these  machines  may  be  used  to  advantage  to  record  and  com- 
pile costs  speedily  and  accurately,  with  a  corresponding  sav- 
ing in  time  and  the  cost  of  clerical  work.  ,;'f,  . v ..'■ 

The  compiling  of  cost  information  covers  such,  a  vast 
amount  of  detail  that  it  is  well  to  keep  costs  as  nearly  as  pps- 


COST  SHEETS  227 

sible  up  to  date.  Often  when  this  work  is  postponed  until  the 
job  is  completed,  detailed  material  and  labor  reports  are  lost 
and  true  costs  cannot  then  be  obtained.  If  the  information  is 
compiled  daily  as  the  current  reports  come  to  hand,  the  figures 
are  much  more  likely  to  be  accurate  than  if  records  are  allowed 
to  accumulate  until  the  origin  of  any  doubtful  facts  or  figures 
is  forgotten. 

Checking  Costs 

The  accuracy  of  the  information  entered  on  the  cost  sheet 
is  not  to  be  depended  upon  unless  a  thorough  system  of  check- 
ing costs  is  installed.  Accountants  often  place  too  much  em- 
phasis upon  the  mathematical  accuracy  of  the  work  and  give 
too  little  attention  to  the  article  cost  as  shown  on  the  cost 
sheet.  Material  and  labor  reports  may  be  disposed  of 
promptly,  and  overhead  costs  may  be  carefully  compiled,  but 
unless  the  figures  are  checked  so  that  the  article  costs  are  re- 
liable, the  system  is  not  serving  its  true  function.  Therefore, 
a  method  of  checking  the  information  compiled  upon  the  cost 
sheet  must  be  provided  for.  This  may  be  done  in  one  of  two 
ways : 

1.  By  means  of  verification  with  the  actual  facts  ob- 

tained  from   blue-prints,   drawings,   sketches,   or 
models  of  the  article  manufactured. 

2.  By  means  of  a  comparison  with  predetermined,  esti- 

mated, standard,  or  previous  costs. 

The  checking  of  the  data  by  the  first  method  requires  a 
practical  man  who  understands  the  material  and  labor  require- 
ments from  the  information  at  hand  as  shown  by  blue-prints, 
drawings,  etc.  If  the  figures  are  found  to  be  incorrect,  an 
investigation  should  be  made  and  the  matter  taken  up  with  the 
foremen  of  the  departments  in  which  the  discrepancies  arise. 
Errors  may  be  due  to  cardessness  in  posting  or  to  mistakes  in 


228  COMPILING  AND  SUMMARIZING  COSTS 

the  detailed  material  and  labor  reports  of  factory  employees. 
If  material  and  labor  costs  are  entered  inaccurately  and  the 
source  of  the  error  cannot  be  discovered,  the  probabilities  are 
that  other  jobs,  orders,  or  articles  are  being  charged  too  much 
or  too  little.  After  the  material  and  labor  costs  are  checked, 
the  overhead  cost  should  be  recalculated.  Where  standard  or 
process  costs  are  used,  the  current  figures  may  be  compared 
with  those  of  previous  periods.  This  comparison  is  important, 
as  it  often  shows  discrepancies  the  rectification  of  which  re- 
sults in  a  more  accurate  method  of  estimating  and  in  the 
elimination  of  inefficiencies. 

When  a  bid  or  selling  price  is  based  upon  an  estimate  of 
cost,  the  actual  cost  should  always  be  compared  with  the  esti- 
mate as  a  means  of  determining  the  correctness  of  the  orig- 
inal bid  or  quotation. 

In  cases  where  it  is  necessary  to  change  the  figures  of  cost 
sheets,  provision  should  be  made  for  summarizing  the  adjust- 
ments and  including  them  in  the  entries  made  to  the  controlling 
accounts. 

Summary  of  Procedure 

The  procedure  in  handling  cost  sheets  may  be  summarized 


as: 


1.  Preparing  the  cost  sheets. 

2.  Posting  the  information  as  shown  by  the  detailed 

material,  labor,  overhead,  and  production  reports. 

3.  Compiling  and  proving  the  costs;  that  is,  adding  the 

departmental  material,  labor,  and  overhead  costs 
and  transferring  the  results  to  the  summary  of 
costs  so  as  to  show  the  job,  order,  or  article  cost. 

4.  Checking  and  comparing  the  costs  so  that  discrepan- 

cies may  be  eliminated  and  true  costs  established. 

5.  Disposing  of  the  cost  sheets,  which  would  include 

transferring  the  costs  to: 


COST  SHEETS 


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230  COMPILING  AND  SUMMARIZING  COSTS 

(a)  The  production  reports 

(b)  Stock  records 

(c)  Plant  asset  records 

(d)  Other  summaries 

Method  of  Filing  Cost  Sheets 

Cost  sheets  may  be  filed  according  to  order  numbers, 
names  or  numbers  of  articles,  customers'  names,  customers' 
order  numbers,  or  in  various  other  ways.  Whatever  method 
of  filing  is  adopted,  a  cross-index  should  be  provided  so  that 
the  sheets  may  be  referred  to  promptly.  If  filed  by  customers' 
names,  alphabetically  arranged,  it  may  be  well  to  have  an 
index  by  article  and  order  numbers,  so  that  any  sheet  may  be 
referred  to  if  the  order  number  or  name  of  the  article  only  is 
known.  If  filed  by  names  of  articles,  a  cross-index  by  cus- 
tomers' names  and  order  numbers  should  be  provided. 

Summary  of  Method  of  Compiling  Cost  Sheets 

Form  45  summarizes  the  information  entered  on  different 
kinds  of  cost  sheets  and  the  method  of  posting  and  checking 
the  data  they  contain. 


CHAPTER  XV 

STOCK  RECORDS 

Purpose  and  Kind 

Stock  records  and  the  method  of  keeping  them  are  im- 
portant features  of  every  cost  accounting  system,  for  the  rea- 
son that  they  can  be  made  to  serve  as  a  perpetual  inventory 
of  materials,  finished  parts,  and  finished  product.  Such  an 
inventory  obviates  the  necessity  of  taking  a  complete  physical 
inventory  at  periodical  intervals  in  the  various  storerooms  and 
departments  of  the  plant,  and  financial  statements  may  be  pre- 
pared at  any  desired  period  by  using  the  information  which  is 
furnished  by  the  stock  records  as  a  basis  for  compiling  inven- 
tory values. 

Though  the  details  of  keeping  stock  differ  in  different  in- 
dustries, the  records  are  more  or  less  standardized,  and  stand- 
ard forms  are  now  supplied  by  the  larger  stationery  and  print- 
ing establishments. 

Method  of  Keeping  Stock  Records 

The  stock  records  constitute  the  subsidiary  ledgers  which 
show  the  detailed  movements  of  merchandise  items.  They  are 
controlled  by  the  stock  accounts  kept  in  the  factory  ledger  or 
the  general  ledger.  These  stock  records  may  be  classified  as 
follows : 

1.  Raw  material  stock  records 

2.  Work  in  process  stock  records 

3.  Finished  parts  stock  records 

4.  Finished  product  stock  records 

5.  Miscellaneous  stock  records 

231 


232  COMPILING  AND  SUMMARIZING  COSTS 

Stock  records  sometimes  show  quantities  only,  or  they 
may  include  monetary  values.  As  a  considerable  portion  of 
the  detail  work  is  eliminated  if  quantities  only  are  shown,  this 
is  the  common  practice.  When  an  inventory  is  taken  the  stock 
is  priced  at  either  cost  or  current  market  price,  and  the  total 
values  as  shown  on  the  detailed  stock  records  are  compared 
with  the  balances  of  the  various  controlling  accounts.  If  any 
discrepancies  are  found,  the  necessary  adjustments  are  then 
made  between  the  controlling  and  the  detail  figures. 

The  better  practice,  however,  is  to  provide  for  showing 
monetary  values  on  the  records.  When  this  is  done,  there  are 
several  methods  of  pricing  the  raw  materials  as  they  are  with- 
drawn from  stock.     Stock  issued  may  be  priced  at: 

1.  The  cost  value  of  the  goods  which  have  been  in  stock 

for  the  longest  period. 

2.  The  cost  value  of  the  goods  which  have  been  most 

recently  purchased,   i.e.,   the   merchandise   which 
has  been  in  stock  the  shortest  time. 

3.  The  highest  cost,  thereby  charging  the  high-priced 

items  to  production  first  and  thus  guarding  against 
a  drop  in  their  market  value. 

4.  The  average  price  paid  for  all  the  merchandise. 

The  above  methods  apply  with  equal  force  to  all  items  of 
finished  parts  and  finished  stock,  as  the  values  of  these  tend  to 
fluctuate  in  the  same  way  as  material  values.  No  matter 
which  of  the  four  methods  mentioned  is  used  for  pricing  with- 
drawals from  stock,  it  should  be  remembered  that  when  a 
physical  count  is  made  or  inventory  is  taken  from  the  informa- 
tion on  the  stock  records,  values  should  be  placed  at  cost  or 
market  price  whichever  is  lower.  It  may  then  be  necessary  to 
adjust  the  stock  records  and  controlling  accounts  so  as  to  start 
the  new  period  with  values  which  will  be  in  agreement  with 
the  inventory  figures  shown  on  the  financial  statements. 


STOCK  RECORDS  233 

Raw  Material  Stock  Records 

The  raw  material  stock  records  show  the  value  of  the 
raw  material  received,  stored,  and  issued.  As  their  function 
is  fully  treated  in  Chapter  VI,  which  deals  with  material  and 
material  reports,  there  only  remains  to  consider  here  the 
various  kinds  of  records.     These  may  be  grouped  as : 

1 .  Records  covering  the  main  stores,  subdivided  in  some 

plants  into  direct  material  items  and  miscellaneous 
supplies. 

2.  Records  dealing  with  the  items  stored  in  various  sub- 

storerooms  throughout  the  plant. 

3.  Records  dealing  with  departmental  storerooms  where 

it  is  necessary  to  keep  a  supply  of  material  or  mis- 
cellaneous supplies  on  hand. 

Departmental  storerooms  are  common  in  large  plants 
where  a  standard  product  is  manufactured  and  where  part  of 
the  material  and  supplies  must  be  close  at  hand  to  keep  up  a 
steady  production.  Under  these  conditions  separate  sets  of 
distinctively  designed  records  may  be  necessary.  For  in- 
stance, in  a  large  furniture  factory  there  might  be  separate 
stock-rooms  and  stock  records  for  the  lumber  stored  in  both 
the  general  lumber  yard  and  in  the  kilns.  Other  records  and 
separate  storerooms  might  be  required  for  the  large  items  of 
hardware  used  in  manufacture,  for  the  main  raw  material 
items  other  than  those  mentioned,  and  for  supplies. 

Work  in  Process  Stock  Records 

As  explained  in  the  preceding  chapter,  the  cost  sheets  con- 
stitute the  inventory,  i.e.,  the  stock  records  of  work  in  process. 
Thus  any  information  required  as  to  the  value  of  work  in  proc- 
ess of  a  certain  kind  or  in  a  particular  department,  can  readily 
be  obtained  by  classifying  the  cost  sheets  by  kinds  of  articles 
manufactured  or  by  departments. 


234 


COMPILING  AND  SUMMARIZING  COSTS 


Finished  Parts  Stock  Record 

The  finished  parts  stock  records  show  the  value  of  all 
finished  or  manufactured  parts  stored  in  various  locations  of 
the  plant.  Like  the  raw  material  records,  they  may  be  divided 
into: 

1.  Records  for  the  main  stores,  which  would  probably 

cover  all  the  finished  parts  stock. 

2.  Sub-storeroom  records  showing  the  items  of  finished 

parts  stock  stored  in  various  departments. 

3.  Records  for  different  classifications  of  the  product; 

e.g.,  one  set  for  the  finished  parts,  another  for 
the  major  or  larger  assemblies,  and  a  third  set  for 
the  minor  or  smaller  assemblies. 

The  same  kind  of  form  may  as  a  rule  be  used  for  record- 
ing the  finished  parts  stock  items  as  is  used  for  the  raw  mate- 
rial items. 

Finished  Stock  Records 

Finished  stock  records,  as  the  term  implies,  relate  to  the 
salable  product  kept  in  stock.  Different  sets  of  records  may 
be  operated  for: 

1.  The  product  stored  in  the  main  warehouses. 

2.  The  stock  stored  in  the  branch  warehouses. 

3.  Any  finished  stock  out  on  consignment. 

4.  Reserve  stock  held  especially  for  orders  in  hand. 

5.  Different  classifications  of  the  product. 

Simple  Types  of  Stock  Records 

A  simple  form  of  stock  record  is  illustrated  in  Form  46. 
This  is  used  in  a  retail  garment  business,  where  a  small  quan- 
tity only  of  each  article  is  carried  in  stock.  When  an  item  is 
taken  into  stock,  details  as  to  the  date  of  receipt,  style  number, 
description  of  the  garment,  and  cost  price  are  entered  in  the 


STOCK  RECORDS 


235 


columns  provided  for  the  purpose.  After  its  sale  the  date, 
charge  sale  or  cash  sale  number,  and  customer's  name  are  re- 
corded. The  form  illustrated  may  be  used  in  all  cases  where 
each  item  of  stock  is  accounted  for  separately  and  when  it 
is  desired  to  keep  a  record  of  the  turnover  of  certain  styles  or 
articles  in  a  line. 


FINISHED  STOCK  RECORD 

Article 

Style 
No. 

Date 
Received 

Cost 

Date 
Shipped 

Sales 
No. 

Customer's  Kame 

. 1 


Form  46.    Finished  Stock  Record.     (Size  8  x  11.) 

Form  47  is  an  equally  simple  type  of  manufacturing 
record  which  may  be  used  for  either  raw  material  or  finished 
parts  stock.  The  ruling  and  the  column  headings  are  self- 
explanatory. 

Records  of  Stock  Available  for  Unfilled  Orders 

It  is  often  desirable  that  the  stock  record  should  separate 
the  stock  available  for  future  orders  and  that  required  for 
orders  in  process  or  received.  When  orders  are  taken  long  in 
advance,  the  question  of  prompt  delivery  becomes  important. 


236 


COMPILING  AND  SUMMAJRIZING  COSt^ 


FINISHED 
Style 

PRODUCTS  AND 

Maximum 

PARTS 

Article 

Minimum 

Produced  or  Bought 

Used  or  Sold 

Balance 

Date 

Quantity 

Cost 

Amount 

Quantity 

Amount 

Quantity 

Amount 

Form  47.    Finished  Product  or  Parts  Stock  Record.     (Size,  8  x  5.) 

The  finished  stock  records  should  then  show  the  orders  re- 
ceived, the  sales  or  orders  filled,  and  the  number  unfilled — as 
illustrated  in  Form  48.  Inquiries  can  then  be  answered 
promptly  when  the  customer  telephones  or  writes  for  informa- 
tion as  to  the  delivery  of  merchandise  still  to  be  shipped. 


Consignment  Records 

Consignment  records  for  finished  stock  which  has  been 
shipped  either  on  memo  or  on  consignment  should,  if  required, 
be  devised  to  suit  particular  needs.  Though  a  record  of  the 
goods  on  consignment  is  invariably  kept  either  in  the  factory 
or  in  the  general  ledger  accounts,  in  cases  where  such  ship- 
ments are  numerous  and  frequent  it  is  well  to  keep  a  separate 
set  of  stock  records  covering  the  movements  of  the  consigned 
stock. 


STOCK  RECORDS 


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238  COMPILING  AND  SUMMARIZING  COSTS 

Semi-Finished  Goods  Stock  Records 

Any  semi-finished  product  that  is  not  taken  care  of  either 
by  the  cost  sheets  or  finished  parts  records,  may  be  recorded 
upon  a  separate  set  of  part-finished  or  semi-finished  stock 
records.  These  are  so  closely  allied  with  finished  parts  stock 
records  that  they  may  be  treated  in  the  same  way.  Where  it  is 
necessary  to  send  raw  materials  and  work  in  a  partly  completed 
stage  to  outside  contractors,  this  material  is  really  sent  on 
consignment,  payment  being  made  for  the  labor  expended  upon 
it  when  the  goods  are  returned.  It  is  necessary  to  keep  a 
complete  record  of  the  movements  of  this  class  of  material.  If 
the  merchandise  is  returned  promptly,  say  within  a  week  or 
two,  a  copy  of  the  invoice  rendered  when  the  work  is  sent  out 
may  serve  for  record  purposes.  After  its  return  this  copy 
may  be  given  to  the  contractor  as  a  receipt  of  delivery,  or  an- 
other invoice  may  be  prepared  showing  the  payment  for  the 
work  done.  This  procedure  eliminates  the  necessity  of  keep- 
ing stock  records.  When  material  remains  out  for  a  con- 
siderable length  of  time,  it  may  be  necessary  to  keep  track  of 
it  by  means  of  more  complete  records. 

Procedure  in  Handling  Stock  Records 

Stock  records  are  virtually  ledger  accounts  and  therefore 
should  be  treated  as  accounting  records.  The  procedure  may 
be  summarized  under  the  following  headings : 

1.  Starting  the  records  with  the  inventory  balance. 

2.  Posting  the  charges. 

3.  Posting  the  credits. 

4.  Testing  their  accuracy. 

5.  Proving  with  factory  accounts. 

6.  Proving  with  physical  inventories. 

7.  Balancing  and  adjusting. 

8.  Filing. 


STOCK  RECORDS 


239 


Entering  Inventory  Balances 

A  cost  system  can  give  accurate  results  only  when  the  orig- 
inal inventory  is  accurate.  The  opening  inventory  should  in- 
clude the  quantity  and  value  of  all  raw  material,  work  in  proc- 
ess, finished  parts,  and  finished  stock.  All  these  quantities 
and  values  must  be  transferred  to  the  stock  records  and  this 
information  constitutes  the  first  set  of  entries  thereon. 

Posting  Charges  and  Credits 

The  charges  posted  to  the  different  stock  records  are  ob- 
tained from  various  sources,  such  as  invoices,  material  re- 
ceived reports,  material  transferred  reports,  stock  transfer 
reports,  and  production  reports.  The  credit  entries  would  be 
obtained  from  material  requisitions,  reports  of  shipments,  pro- 
duction reports,  and  miscellaneous  stock  transfer  reports. 
Postings  should  be  made  daily  if  possible,  so  that  the  records 
may  always  show  the  true  state  of  the  inventory. 

In  posting  the  various  charges  and  credits,  the  method  of 
determining  the  prices  should  be  well  understood  and  estab- 
lished in  accordance  with  a  standard  practice  which  should 
be  consistently  adhered  to. 

Testing,  Proving,  and  Adjusting 

The  balances  of  the  stock  records  should,  from  time  to 
time,  be  compared  with  the  actual  quantities  on  hand.  The 
raw  material,  finished  parts,  and  finished  stock  items  may  be 
tested  at  regular  intervals  during  the  year  to  insure  the  records 
being  in  agreement  with  the  actual  facts.  The  work  in  process 
stock  records,  i.e.,  the  cost  sheet  figures,  should  be  checked  at 
the  end  of  each  cost  period,  especially  on  those  jobs  which  have 
been  in  process  for  a  long  time.  Under  lax  conditions  it  is  not 
uncommon  for  a  job  to  leave  the  operating  departments  and 
be  disposed  of  in  some  way  without  its  being  reported  to  the 
office.     A  cost  sheet  showing  a  portion  of  the  accumulated 


^40  COMPILING  AND  SUMMARIZING  COSTS 

costs  might  remain  in  the  office  and  no  disposition  be  made  of 
the  item  because  the  foreman  or  factory  clerk  has  failed  to 
report  that  the  work  or  job  has  been  completed.  Such  work 
in  process  should  never  be  allowed  to  remain  dormant,  and 
all  inactive  items  should  be  investigated  and  properly  disposed 
of  by  means  of  accounting  adjustments.  In  factories  where  a 
large  number  of  small  orders  are  always  in  process,  uncom- 
pleted work  tends  to  accummulate  and  congest  operations. 

The  frequency  with  which  the  various  stock  records  may 
be  proved  with  the  controlling  accounts  will  depend,  to  a  large 
extent,  upon  whether  or  not  money  values  are  recorded  on  the 
detailed  records.  When  money  values  are  shown,  a  detailed 
list  of  the  balances  may  be  prepared  at  the  end  of  each  cost 
period  or  at  such  time  as  proof  is  desired.  This  list  consti- 
tutes a  trial  balance  of  the  stock  records,  and  the  total  of  all 
the  balances  should  be  in  agreement  with  the  balances  of  the 
different  controlling  accounts  as  shown  in  the  factory  ledger 
or  the  general  ledger. 

If  money  values  are  not  shown  upon  the  detailed  stock 
records,  a  proof  is  made  at  such  time  as  physical  inventories 
are  taken  and  the  stock  items  are  priced.  When  this  is  done 
it  may  be  necessary  to  adjust  differences  between  the  detailed 
and  the  controlling  balances.  Such  discrepancies  may  be  due 
to  errors  in  figuring  or  to  differences  which  arise  in  calculating 
the  material  reports  when  the  figures  run  to  fractions  or  several 
decimal  points.  When  adjustments  are  found  to  be  necessary, 
an  attempt  should  be  made  to  discover  the  cause  of  the  dis- 
crepancies and  to  eliminate  the  inefficiencies  of  which  they 
are  evidence. 

Loose-Leaf  Versus  Bound  Stock  Record 

Stock  records  may  be  kept  in  the  form  of  a  bound  book, 
loose-leaf  sheets,  or  upon  loose  cards.  As  they  are  in  fact 
ledger  accounts,  they  should  take  the  form  of  a  ledger  showing 


STOCK  RECORDS  241 

debits  and  credits.  In  deciding  which  is  the  most  serviceable 
foiTTi,  the  size  of  the  record  should  be  considered.  Large 
cards  are  unwieldy  to  handle,  and  if  it  is  decided  that  they 
should  be  used,  an  effort  should  be  made  to  keep  them  within 
the  standard  sizes  so  as  to  permit  their  convenient  manipula- 
tion. Loose-leaf  sheets  or  cards  are  more  practicable  than 
bound  stock  records,  as  the  records  of  slow-moving  or  obsolete 
stock  items  can  be  removed  from  the  binder  or  file,  there- 
by saving  time  in  reference. 

Obsolete  Stock  Record 

In  every  stock-keeping  system,  records  of  slow-moving  or 
obsolete  items  of  stock  should  be  eliminated.  It  is  often  prac- 
ticable to  keep  a  separate  "obsolete"  section  for  these  ques- 
tionable items,  in  which  the  records  relating  thereto  are  filed. 
In  large  manufacturing  plants  obsolete  or  "dead"  items  tend 
to  accumulate.  Provision  should  be  made  for  keeping  a  close 
watch  over  this  tendency  and  reducing  the  **dead"  items  to  a 
minimum,  thus  economizing  in  the  capital  investment. 

Filing  Stock  Records 

The  filing  and  arrangement  of  the  stock  records  will  de- 
pend to  a  large  extent  upon  the  classes  of  merchandise  carried 
in  stock.  If  the  items  are  known  by  definite  symbols,  the 
records  may  be  arranged  and  filed  according  to  the  symbols 
used.  Symbols,  it  may  be  noted,  are  a  useful  and  time-saving 
means  of  referring  to  a  large  number  of  records,  and  as  nu- 
merous postings  have  to  be  made  to  these  records  it  will  be  seen 
that  a  quick  means  of  reference  is  a  desirable, feature.  When 
numerous  sizes  of  each  article  are  kept  in  stock  it  is  some- 
times convenient  to  summarize  the  various  sizes  on  one  stock 
record,  this  main  record  being  supported  by  individual  records 
showing  the  quantity  on  hand  of  each  size. 


CHAPTER  XVI 

SUMMARIZING    RECORDS— CHARGING    FACTORY 
EXPENDITURES 

Purpose  of  Summarizing  Records 

Where  an  attempt  is  made  to  keep  costs  for  the  purpose 
of  ascertaining  selHng  prices  which  will  net  a  reasonable  profit, 
the  cost  sheets  should  record  true  facts  as  nearly  as  it  is  pos- 
sible to  obtain  them.  Often  these  records  are  supplemented 
by  a  comprehensive  system  of  stock  reports,  but  at  that  point 
the  accuracy  of  the  system  breaks  down.  No  provision  is 
made  for  summarizing  the  various  details  so  as  to  permit  of 
an  accounting  proof  of  the  mathematical  accuracy  of  the  de- 
tailed records.  In  other  words,  an  elaborate  system  of  reports 
dealing  with  factory  routine  is  installed  which  is  separate  and 
distinct  from  the  accounting  records,  there  being  no  connecting 
link  between  the  two  sets  of  records. 

This  link  is  provided  by  certain  cost  summarizing  records 
which  are  used  for  the  purpose  of  compiling  material,  labor, 
and  overhead  costs  as  a  basis  for  making  entries  to  the  factory 
ledger  controlling  accounts.  These  entries  are  made  in  order 
to  summarize,  for  the  period,  the  following  data: 

1.  Factory  expenditures. 

2.  Transfers  of  material,  labor,  and  ovierhead  items  be- 

tween departments. 

3.  Credit^  to  departments  for  work  done. 

4.  Miscellaneous  adjusting  entries. 

Each  of  these  four  different  kinds  of  controlling  entries 
needs  its  own  summary  records.  Those  relating  to  factory  ex- 
penditures are  discussed  in  this  chapter,  leaving  for  later  con- 

242 


CHARGING  FACTORY  EXPENDITURES  243 

sideration  the  summaries  covering  transfers,  credits,  and  mis- 
cellaneous adjusting  entries. 

Cost  Period 

Summarizing  records  are  prepared  at  the  end  of  the  cost 
period,  which  is  the  unit  of  time  covered  by  the  review  of  fac- 
tory operations.  In  most  plants  the  cost  period  is  in  agree- 
ment with  the  pay-roll  period.  For  example,  in  the  majority 
of  cases  wages  are  paid  weekly,  and  for  this  reason  the  finan- 
cial year  is  often  divided  into  thirteen  periods  of  four  weeks 
each.  Where  wages  are  paid  once  or  twice  monthly,  the  cal- 
endar month  may  constitute  the  cost  period.  Again,  the 
year  may  be  divided  into  twelve  cost  periods,  regardless  of  the  ■ 
number  of  days  in  each  month.  When  wages  are  paid  weekly 
and  there  are  twelve  cost  periods  to  the  year,  the  common 
practice  is  for  two  four-week  periods  to  be  followed  by  a  five- 
week  period,  and  so  on  throughout  the  year.  The  calendar 
month  is  sometimes  used  as  a  cost  period  even  though  wages 
are  paid  weekly,  and  in  this  case  the  accrued  wages  must  be 
taken  into  consideration  at  the  end  of  each  month.  But  to 
obviate  the  clerical  work  involved  in  calculating  accrued  sala- 
ries and  wages,  the  cost  period  is  usually  in  agreement  with  the 
pay-roll  period. 

Charging  Factory  Expenditures 

The  accounting  records  on  which  charges  are  compiled 
for  entry  upon  the  controlling  accounts,  include  the  following : 

1.  Purchase  record 

2.  Accounts  payable  voucher  and  voucher  register 

3.  Summary  of  material  received 

4.  Expense  distribution  record 

5.  Pay-roll  and  pay-roll  analysis 

In  some  cases  the  department  charges  for  material  may 
be  obtained  from  either  the  purchase  record  or  voucher  regis- 


244 


COMPILING  AND  SUMMARIZING  COSTS 


ter,  or  from  a  distribution  sheet  if  a  more  detailed  analysis 
is  made  on  such  a  record.  In  other  cases  the  source  of  the 
material  charges  is  a  summary  of  material  received.  The  de- 
partmental labor  charges  are  in  all  cases  obtained  from  a  pay- 
roll record  or  analysis  of  the  pay-roll. 

The  departmental  overhead  charges  are  obtained  from 
both  the  purchase  record  (or  voucher  register,  if  this  be  used 
instead  of  a  purchase  record)  and  the  pay-roll  or  pay-roll 
analysis,  and  distributed  to  the  expense  distribution  record  or 
analysis  sheet. 

Method  of  Handling  Purchase  Invoices 

Creditors'  invoices  for  materials,  supplies,  and  equipment 
are  the  source  for  the  entries  upon  the  purchase  record.  The 
invoices  should  be  supported  by  the  reports  of  material  re- 
ceived, purchase  requisitions,  and  purchase  orders  as  a  check 
against  quantity,  kind,  and  price  of  material  ordered  and  re- 
ceived. When  invoices  are  entered  on  the  purchase  record,  it 
is  customary  to  stamp  thereon  all  or  part  of  the  information 
g^ven  in  Form  49.     The  number  of  details  included  in  the 


Invoice  Number 

Date  Material  Received 

Material  Received  Report  Number.. 

Purchase  Requisition  Number 

Purchase  Order  Number 

Quantity  O.  K 

Price  O.  K 

Extensions  O.  K 

Approved ! 

Entry  on  Stock  Records 

Entry  on  Purchase  Record 


Fcjrm  49.  Invoice  Stamp,  Covering  Data  for  Purchase  Record 
(Size,  3  X  3.) 


CHARGING  FACTORY  EXPENDITURES  24S 

Stamp  will,  of  course,  be  determined  by  the  needs  of  the  case. 
The  persons  responsible  for  filling  in  the  details  should  sign 
their  initials  to  show  that  they  have  taken  care  of  the  matter. 
After  the  invoices  have  been  properly  stamped  and  found  to 
be  correct,  they  are  ready  for  entry  in  the  purchase  record. 

Purchase  Record 

The  purchase  record  (also  termed  "Invoice  Book,"  "Pur- 
chase Journal,"  "Invoice  Journal,"  and  "Purchase  Analysis"), 
gathers  and  classifies  the  material  charges  and  certain  items 
of  expense.  Its  columns  provide  for  recording  the  date,  in 
some  instances  the  number  of  the  invoice,  the  name  of  the 
creditor,  and  the  posting  references.  The  money  columns 
show  the  total  amount  of  the  invoices  and  the  distribution  of 
the  items  to  the  material,  expense,  and  equipment  accounts 
affected.  Additional  columns  often  describe  the  articles  pur- 
chased and  give  information  as  to  terms  of  payment.  As, 
however,  every  entry  should  be  supported  by  an  invoice  or 
voucher  of  some  kind,  it  should  not  be  necessary  to  write  all 
details  in  a  summary  record  of  this  character.  Form  50  illus- 
trates a  simple  form  of  purchase  record. 

Posting  from  Purchase  Record 

In  posting  from  the  purchase  record,  the  total  of  all  the 
invoices  is  credited  to  the  Accounts  Payable  controlling  ac- 
count, if  this  account  is  kept,  while  the  amounts  entered  in  the 
total  column  are  credited  to  the  various  creditors'  accounts  in 
detail.  The  totals  of  the  distribution  columns  with  the  excep- 
tion of  that  devoted  to  miscellaneous  items,  should  be  debited 
to  the  accounts  affected,  while  the  items  entered  in  the  mis- 
cellaneous column  should  be  posted  in  detail  to  the  debit  of 
each  account  named  therein.  When  separate  general  and  fac- 
tory ledgers  are  used,  care  must  be  exercised  to  see  that  the 
proper  control  is  established  between  the  two  ledgers. 


246 


COMPILING  AND  SUMMARIZING  COSTS 


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CHARGING  FACTORY  EXPENDITURES 


247 


Accounts  Payable  Voucher 

Instead  of  the  purchase  record  described  above,  invoices 
may  be  entered  in  a  voucher  register,  thus  eliminating  the 
creditors  ledger.  Under  these  circumstances,  an  accounts  pay- 
able voucher  form  is  often  used  for  the  purpose  of  Hsting  and 
classifying  the  invoices  received  during  a  definite  period  from 
one  particular  creditor.     (See  Form  51.) 

Voucher  forms  are  numbered  in  advance  and  each  form 
provides  for  recording  the  dates  of  the  voucher  and  invoices, 
the  name  of  the  creditor,  the  date  of  payment,  check  number 
or  cash  book  reference  number,  the  signatures  of  the  person 
who  prepares  the  voucher  and  the  executive  who  approves  it. 
As  the  primary  function  of  a  voucher  is  to  analyze  the  invoice 
charge,  the  names  or  symbols  of  the  accounts  which  may  be 


Date 

OF 

Invoice 

Particulars 

Amounts 

■ 

Audited:                                                Approved  for  Payment 

Form  51.    (a)  Accoimts  Payable  Voucher  (inside).    (Size,  9  x  8.) 


248 


COMPILING  AND  SUMMARIZING  COSTS 


affected  are  often  printed  upon  the  back  of  the  form.  While 
this  practice  saves  time,  a  better  plan  is  to  refer  to  a  list  of 
accounts  and  symbol  numbers  when  distributing  the  invoice 
expenditures.  When  the  account  classification  runs  into  hun- 
dreds or  even  thousands,  it  is  obviously  impracticable  to  print 
their  names  upon  the  voucher  form. 

Minor  details  worth  noting  in  connection  with  the  opera- 
tion of  voucher  forms  are,  that  the  certification  as  to  the  cor- 
rectness of  the  invoice  may  be  stamped  upon  the  voucher  in- 
stead of  the  invoice,  that  spaces  for  recording  the  information 


ACCOUNTS  PAYABLE  VOUCHER 

Favor  of No 

Address Date 

General  Ledger  Accounts  | 

Factory  Ledger  Accounts 

ACXOUNT  No. 

v_ 

Amount 

Account  No. 

V 

Amount 

Total 

Total 

Date  Paid Check  No 

Voucher  Register  E 

>ntry 

Form  51.    (b)  Accounts  Payable  Voucher  (outside).    (Size,  8  x  9.) 


CHARGING  FACTORY  EXPENDITURES  249 

as  to  the  terms  of  payment  may  also  be  provided,  and  that  the 
purchase  requisition,  purchase  order,  and  material  received  re- 
port may  be  attached  to  the  voucher  instead  of  to  the  invoice. 
In  fact,  sometimes  the  canceled  check  in  payment  of  the 
voucher  is  also  attached,  or  the  check  may  form  part  of  the 
voucher.  Where  this  is  done  the  term  "voucher  check"  is 
used. 

It  will  be  seen  that  the  voucher  gives  a  complete  his- 
tory of  the  transactions  covered  by  the  invoice,  and  also  pro- 
vides for  a  uniform  method  of  filing  creditors'  invoices.  The 
forms  should  all  be  of  the  same  size  (about  8x9  inches), 
so  that  the  records  when  folded  will  be  of  convenient  size  for 
filing. 

The  question  sometimes  arises  as  to  whether  a  separate 
voucher  should  be  made  out  for  each  invoice,  or  whether  all 
invoices  received  from  one  creditor  should  be  grouped  upon 
one  voucher.  It  depends  upon  the  method  of  payment.  If 
creditors'  accounts  are  paid  monthly,  all  invoices  from  the 
same  creditor  should  be  grouped  and  entered  together.  If  in- 
voices are  paid  separately,  it  would  obviously  be  impracticable 
to  postpone  the  preparation  of  the  voucher  until  the  end  of  the 
month.  Moreover,  the  postponement  of  the  work  would,  in 
many  cases,  delay  the  preparation  of  the  summary  records  and 
statements. 

Under  some  conditions  of  manufacture  the  pay-roll  record 
may  be  attached  to  the  accounts  payable  voucher  form.  If  the 
pay-roll  is  in  book  form,  either  bound  or  loose-leaf,  reference 
may  be  made  upon  the  voucher  to  the  pages  or  sheet  numbers 
of  the  pay-rolls  and  only  the  analysis  need  then  appear  upon 
the  voucher.  This  eliminates  the  attaching  of  numerous 
records  to  the  voucher,  as  pay-roll  records  are  often  bulky. 

In  small  manufacturing  plants  it  is  often  practicable  to 
have  all  charges  to  factory  and  expense  accounts,  as  well  as 
many  of  the  charges  to  the  asset  accounts,  appear  upon  this 


250 


COMPILING  AND  SUMMARIZING  COSTS 


one  record.  In  other  words,  no  charges  to  expense  of  any 
nature  or  to  the  factory  accounts  are  entered  on  the  credit  side 
of  the  cash  book  for  posting  to  the  debit  of  the  various  ac- 
counts affected.  All  expenditure  items  are  vouched  for  entry 
in  the  voucher  register. 

Accounts  payable  vouchers  may  be  prepared  even  though 
a  voucher  register  is  not  used  in  connection  with  these  docu- 
ments, and  entered  in  any  kind  of  a  purchase  record. 

Voucher  Register 

The  voucher  register  (also  termed  "Register  of  Accounts 
Payable,"  "Accounts  Payable  Register,"  and  "Record  of 
Audited  Vouchers")  is  used  to  summarize  and  analyze  credi- 
tors' invoices.  (See  Form  52.)  Though  vouchers  are  usu- 
ally used  in  connection  with  this  register,  invoices  may  be  used 
without  preparing  separate  accounts  payable  vouchers. 

The  voucher  register  differs  from  the  purchase  record  in 
that  it  provides  additional  columns  for  recording  information 
as  to  the  payment  of  the  invoices.  It  is  a  combination  of  the 
purchase  record  and  purchase  ledger,  eliminating  the  necessity 
for  keeping  detailed  creditors'  accounts.  To  simplify  the  dis- 
cussion of  this  register,  it  may  be  divided  into  three  sections : 

1.  The  descriptive  section,  giving  the  date,  voucher  or 

invoice  number,  name  of  creditor,  amount,  and  in 
some  cases  the  terms  of  payment  and  a  description 
of  the  goods. 

2.  The  payment  section,  showing  the  amount  and  date 

of  payment,  check  number,  and  the  name  of  bank 
or  cash  book  folio  reference. 
'3.  The  distribution  section,  showing  the  charges  to  the 
accounts,  columns  being  headed  with  the  names 
of  those  account  items  which  occur  frequently  dur- 
ing the  month.  Miscellaneous  charges  of  rare 
occurrence  are  entered  in  a  miscellaneous  column. 


CHARGING  FACTORY  EXPENDITURES  251 

Posting  from  Voucher  Register 

Postings  from  the  voucher  register  are  made  as  follows : 
The  total  of  the  total  vouchers  payable  column  is  credited  to 
the  controlling  Accounts  Payable  account.  The  totals  of  the 
distribution  columns,  with  the  exception  of  the  miscellaneous 
column,  are  debited  to  the  various  accounts  affected.  The 
sundry  items  are  debited  to  the  account  mentioned  in  each  case. 

Where  separate  factory  and  general  ledgers  are  kept,  care 
must  be  taken  to  maintain  the  proper  control  between  the  two. 
The  totals  of  the  factory  ledger  account  columns  should  be 
posted  to  the  controlling  factory  account  in  the  general  ledger 
if  the  general  ledger  controls  the  factory  ledger  entries. 

Advantages  and  Disadvantages  of  Voucher  Register 

The  use  of  the  voucher  register  has  its  advantages  and  its 
disadvantages.  An  objection  sometimes  raised  is  that,  as  no 
creditors'  accounts  are  kept  therein,  information  as  to  the  total 
amount  of  purchases  from  any  one  creditor  cannot  be  readily 
obtained.  This  objection  is  overcome  by  keeping  a  proper  in- 
dex, say  on  3  X  5  fihng  cards,  of  the  names  of  the  creditors, 
filed  alphabetically;  on  each  card  would  also  appear  the  num- 
bers and  dates  of  creditors'  vouchers,  recorded  when  the 
vouchers  are  entered  in  the  register.  The  amount  of  business 
done  with  any  creditor  during  a  particular  period  of  time, 
though  not  always  vital  information,  is  required  by  many  busi- 
ness men  for  their  personal  satisfaction  and  may  also  be  useful 
at  times  for  the  purpose  of  obtaining  rebates,  refunds,  com- 
missions, special  allowances,  revised  prices  on  future  contracts, 
and  so  on.  Where  this  information  is  essential,  the  purchase 
ledger  provides  it  in  more  convenient  form  than  the  voucher 
register.  On  the  other  hand,  when  the  total  amount  of  busi- 
ness is  required  by  kinds  of  merchandise  purchased,  the 
voucher  register  answers  the  purpose  equally  as  well,  since  in 
both  cases  references  must  be  made  to  the  invoices. 


252 


COMPILING  AND  SUMMARIZING  COSTS 


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CHARGING  FACTORY  EXPENDITURES 


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COMPILING  AND  SUMMARIZING  COSTS 


Another  objection  against  the  voucher  register  is  that  it 
does  not  provide  for  information  as  to  allowances  or  adjust- 
ments after  the  invoices  have  been  entered.  This  is  met  by 
the  fact  that  journal  entries  showing  invoice  adjustments  may 
be  entered  in  the  payment  columns.  Where,  however,  numer- 
ous adjusting  entries  have  to  be  made  to  certain  accounts,  it  is 
more  convenient  to  keep  purchase  ledger  accounts  with  such 
creditors.  As  a  general  rule,  in  most  industries  from  75%  to 
95%  of  creditors'  accounts  are  paid  as  per  invoice  amounts 
without  dispute,  and  therefore  the  number  of  the  accounts  re- 
quiring adjustment  is  usually  small. 

A  final  objection  to  the  use  of  the  voucher  register  is 
found  in  cases  where  partial  payments  or  payments  on  account 
are  made.  Under  these  circumstances  it  is  often  more  prac- 
ticable to  keep  a  separate  purchase  record  and  ledger,  unless 
the  accounts  settled  by  partial  payments  form  a  small  portion 
of  the  total  number,  in  which  case  they  may  be  handled  as  sug- 
gested below. 

Combination  Voucher  Register  and  Purchase  Record 

A  voucher  register  may  be  designed  with  two  total  col- 
umns, one  headed  "Voucher  Register  Items"  and  the  other 
"Purchase  Ledger  Items."  Those  items  for  which  it  is  neces- 
sary to  keep  detailed  creditors'  accounts  may  be  entered  in  the 
purchase  ledger  column  and  the  rest  in  the  voucher  register 
column.  This  method  saves  time  by  eliminating  many  of  the 
postings  to  creditors'  accounts. 

Distribution  or  Analysis  Record 

The  classifications  of  the  general  and  the  factory  ledger 
accounts  are  usually  so  elaborate  in  manufacturing  businesses 
where  a  complete  cost  system  is  installed,  that  adequate  colum- 
nar provision  can  rarely  be  made  in  the  purchase  record  or 
voucher  register  for  a  complete  analysis  of  the  various  expen- 


CHARGING  FACTORY  EXPENDITURES 


255 


ditures.  If  the  necessary  number  of  columns  were  provided  to 
take  care  of  this  elaborate  analysis,  the  width  of  the  sheets 
would  make  the  record  so  cumbersome  and  bulky  as  to  be  im- 
practicable for  everyday  use.  Therefore,  a  supplementary 
record  is  often  necessary  for  the  purpose  of  classifying  the 
items  of  expenditures  so  that  postings  may  be  more  readily 
made  to  the  accounts  affected. 

This  supplementary  record  is  known  as  an  "Analysis 
Record,"  ^'Distribution  Record,"  or  "Summary  Record."  (See 
Form  53.)  Its  purpose  is  to  support  the  purchase  record  or 
voucher  register  and  permit  the  proving  of  the  columns  of  the 
latter  before  any  postings  are  made  to  the  ledger.  Separate 
records  or  sheets  may  be  kept  for  the  analysis  of  the  material 
charges,  overhead  expense  items,  selling  expenses,  and  admin- 
istrative expenses.  Also,  if  it  is  necessary  to  analyze  the 
various  expenses  affecting  different  departments,  a  separate 
record  may  be  kept  for  each  department. 

However,  even  this  method  may  become  cumbersome,  due 
to  the  number  of  books  or  the  number  of  columns  necessary  to 
compile  the  information.  If  such  is  the  case,  the  analysis  may 
be  made  by  means  of  a  number  of  accounts  kept  on  separate 
cards  or  sheets,  headed  with  the  names  of  the  expenses.  The 
details  as  to  the  date  of  the  item  posted,  reference  number,  and 
amount  may  be  entered  in  the  spaces  provided  for  recording 
this,  information  for  each  period.  In  some  instances  it  may 
be  necessary  to  give  a  description  of  each  item  as  well  as  names 
and  quantities,  in  which  case  the  distribution  record  should 
provide  for  recording  this  information.  When  such  a  dis- 
tribution record  is  kept,  the  totals  of  the  detailed  items  are 
proved  with  the  totals  of  the  various  columns  in  the  purchase 
record  or  voucher  register,  this  proof  being  prepared  by  means 
of  an  adding  machine. 

There  are  various  forms  of  distribution  record,  all  similar 
in  character  to  Form  53.     The  name  of  the  account  and  the 


256 


COMPILING  AND  SUMMARIZING  COSTS 


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CHARGING  FACTORY  EXPENDITURES  257 

symbol  appear  at  the  top  of  the  sheet,  and  the  columns  are 
headed  with  the  months  of  the  year  or  the  definite  cost  periods. 
A  reference  column  and  an  amount  column  are  also  provided 
for  summarizing  the  items  affecting  the  account  named  in  the 
heading.  At  the  end  of  the  month,  after  the  figures  have  been 
proved  with  those  of  the  purchase  record  or  voucher  register, 
postings  may  be  made  directly  to  the  ledger  accounts.  When 
a  proof  is  made  by  means  of  a  listing  adding  machine,  it  is 
well  to  use  this  list  as  a  guide  to,  or  a  check  on,  the  postings 
to  the  ledger  accounts. 

Form  53  may  be  developed  to  provide  spaces  for  a  de- 
scription of  the  items  or  for  inserting  quantities,  or  any  number 
of  changes  may  be  made  without  destroying  the  original  idea. 
The  sheets  should  be  bound  in  a  loose-leaf  binder  and  classified 
by  account,  name,  and  number  in  appropriate  sections  of  the 
binder.  Thus,  one  section  may  be  devoted  to  material  ac- 
counts, another  to  factory  expenses,  a  third  to  selling  expenses, 
a  fourth  to  administrative  expenses,  another  to  miscellaneous 
charges,  and  others  to  factory  departments — the  number  of 
sections  being  governed  by  the  various  columns  in  the  pur- 
chase record  or  voucher  register. 

Summary  of  Material  Received 

In  some  cases  purchases  of  material  can  conveniently  be 
posted  to  the  various  stock  records  affected  directly  from  the 
invoices  or  vouchers,  supported  by  the  reports  of  material  re- 
ceived. In  other  cases  it  is  more  practicable  to  summarize  the 
material  received  and  prove  this  summary  with  the  figures 
shown  by  the  purchase  record  or  voucher  register,  together 
with  their  supporting  documents.  Such  a  summary,  known 
as  a  "Summary  of  Material  Received,"  "Report  of  Material 
Received,"  or  "Summary  of  Incoming  Materials  and  Sup- 
plies," is  prepared  from  the  detailed  reports  of  material  re- 
ceived, and  if  monetary  values  are  necessary,  the  information 


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CHARGING  FACTORY  EXPENDITURES  259 

is  obtained  from  invoices.  This  record  is  used  where  it  is 
necessary  to  summarize  information  so  as  to  facilitate  gostings 
to  the  detailed  stock  records. 

The  summary  of  material  received  (Form  54)  is  headed 
with  its  date  and  number.  The  columns  show  the  numbers  of 
the  material  reports  and  amounts  to  be  charged  to  the  various 
accounts,  a  total  column  being  also  provided  as  a  check  on 
the  accuracy  of  the  distributed  figures  entered  in  the  various 
columns.  It  may  occasionally  be  necessary  to  give  details  as 
to  the  names  of  creditors  and  a  description  of  the  articles  pur- 
chased, but  this  information  will  rarely  be  needed,  as  it  is 
given  in  the  detailed  reports  of  material  received. 

A  summary  of  material  received  may  also  be  used  as  an 
intermediate  record  for  the  purpose  of  compiling  the  material 
charges  to  definite  jobs,  orders,  or  articles. 

A  specialized  form  of  summary  of  material  received  is 
the  so-called  "Tally  Sheet"  used  in  wood-working  plants. 
Such  a  sheet  shows  the  quantities  of  the  various  grades  and 
kinds  of  lumber  received,  and  thus  serves  as  a  check  on  the 
invoices.  Other  special  forms  for  showing  the  receipt  of  in- 
coming materials  of  different  kinds  are  frequently  met  with, 
and  all  of  them  may  be  considered  as  summaries  of  material 
received. 

Pay-Roll 

An  analysis  of  the  pay-roll  is  required  for  the  purpose 
of  compiling  the  totals  of  the  labor  charges  to  be  posted  to  the 
ledger  accounts  affected.  In  small  manufacturing  plants  the 
analysis  may  be  made  on  the  pay-roll  when  the  time  and  labor 
reports  are  entered  thereon.  Where  two  records  are  used,  the 
pay-roll  may  be  prepared  from  the  time  reports,  and  the  pay- 
roll analysis  from  the  labor  reports,  in  which  case  one  should 
check  the  other. 

As  the  primary  purpose  of  the  pay-roll  is  to  ascertain  the 


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CHARGING  FACTORY  EXPENDITURES  261 

wages  of  employees,  the  record  may  be  simple  in  character, 
showing  the  employees'  numbers,  names,  and  amount  of  wages 
for  the  pay-roll  period.  The  details  as  to  hours  of  work  and 
production  would  then  appear  on  the  time  reports  of  each  in- 
dividual employee.  An  elaboration  of  this  record  shows  the 
daily  time  and  wages  posted  in  separate  columns  at  the  end 
of  each  day.  On  a  record  kept  in  this  way,  the  total  time  of 
each  employee  would  be  ascertained  and  entered  in  a  total  col- 
umn at  the  end  of  the  pay-roll  period.  The  day  or  hourly  rate 
would  be  shown  in  a  separate  column,  and  after  multiplying 
the  total  time  by  this  rate,  the  total  amount  of  wages  would 
be  ascertained  and  entered  in  a  total  wages  column. 

Columns  may  also  be  provided  for  deductions  for  tools, 
supplies,  advances,  or  other  miscellaneous  items  which  are 
charged  employees,  such  as  fines  on  account  of  their  work,  and 
so  on.  The  use  of  such  columns  necessitates  an  additional 
column  to  show  the  net  amount  paid  to  each  employee. 

Form  55  is  a  pay-roll  record  which  may  be  prepared  daily 
from  time  reports  in  the  way  suggested  above. 

Where  departments  are  many  and  employees  numerous, 
separate  pay-roll  records  are  usually  prepared  for  each  depart- 
ment of  the  plant,  and  in  some  cases  the  pay  day  is  not  the 
same  for  all  departments,  it  being  more  convenient  to  spread 
the  work  of  preparing  the  pay-roll  and  paying  the  employees 
over  the  week  or  month.  The  use  of  separate  departmental 
pay-roll  records  often  constitutes  in  itself  an  analysis,  no  addi- 
tional records  being  required. 

Pay-Roll  Analysis 

A  pay-roll  analysis  (Form  56)  is  prepared  to  ascertain 
the  total  wages  of  each  department  and  also  the  amount  of 
productive  labor  as  separate  and  distinct  from  non-productive 
labor,  preparatory  to  charging  these  various  totals  to  their 
proper  accounts.  Therefore,  an  analysis  of  the  pay-roll  is 
made  to  show ; 


262  COMPILING  AND  SUMMARIZING  COSTS 

1.  The  productive  labor  chargeable  to  each  department. 

2.  The   detailed    items    composing   the    non-productive 

labor. 

3.  The  distribution  of  the  items  of  non-productive  labor 

to  departments. 

Complex  conditions  in  large  plants  often  make  it  impos- 
sible to  combine  the  pay-roll  analysis  with  the  pay-roll,  as  a 
complex  analysis  may  delay  the  work  and  thus  interfere  with 
the  paying  of  employees.  For  this  reason  the  analysis  is  often 
prepared  after  the  pay  day. 

In  a  small  plant  the  pay-roll  analysis  may  be  made  on  the 
ordinary  columnar  sheets,  bound  or  in  loose-leaf  form.  But 
where  departments  are  numerous  and  the  analysis  of  the  pay- 
roll in  consequence  is  elaborate,  columnar  sheets  are  too  cum- 
bersome to  be  satisfactory.  In  such  a  case,  the  analysis  may 
be  made  on  as  many  sheets  as  there  are  labor  accounts,  in  the 
same  manner  as  an  analysis  of  purchases  is  made  on  the  dis- 
tribution records  described  in  this  chapter.  In  fact,  the  pay- 
roll analysis  may  form  a  part  of  the  distribution  record  and  be 
kept  in  a  separate  section  of  that  record.  It  should  then  be 
balanced  and  proved  with  the  pay-roll  before  postings  are 
made  to  the  ledger  accounts. 

As  already  mentioned,  the  pay-roll  totals  may  be  entered 
on  the  voucher  register,  being  supported  by  an  accounts  pay- 
able voucher.  If  this  method  is  used,  the  detailed  items  would 
still  have  to  be  distributed  so  as  to  compile  the  charges  to  the 
ledger  accounts.  When  employees  are  numerous  this  analysis 
is  elaborate,  and  in  that  case  it  would  be  preferable  to  make  it 
separately  in  the  distribution  record.  This  procedure,  how- 
ever, is  not  always  necessary,  in  which  case  the  postings  to  the 
accounts  affected  may  be  made  directly  from  the  voucher 
register. 

Where  a  separate  pay-roll  analysis  is  prepared,  the  post- 
ings to  the  ledger  would  be  as  follows :  The  figures  of  the  total 


CHARGING  FACTORY  EXPENDITURES 


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264  COMPILING  AND  SUMMARIZING  COSTS 

column  are  credited  to  a  Pay-Roil  account  on  the  general  led- 
ger, while  the  totals  of  the  distribution  columns  are  debited 
to  the  departmental  productive  labor  accounts  and  indirect  ex- 
pense accounts  affected.  If  a  separate  distribution  record  is 
kept  for  each  account,  the  postings  are  made  in  the  same  way 
excepting,  of  course,  that  the  figures  are  taken  from  several 
sheets  instead  of  a  single  sheet. 

Form  56  represents  a  pay-roll  analysis  prepared  from 
labor  reports  at  the  end  of  each  pay-roll  period. 

Where  wages  are  paid  weekly,  the  pay-roll  analysis  at  the 
end  of  each  week  should  check  with  the  pay-roll.  If  the  cost 
period  is  based  on  the  calendar  month,  the  accrued  wages  at 
the  end  of  the  month  should  be  added  to  the  totals  for  the 
several  weeks  so  that  the  charges  posted  to  the  ledger  accounts 
may  include  the  wages  for  the  entire  month. 

If  both  the  cost  and  pay  periods  are  on  a  monthly  basis, 
no  accrued  wages  need  be  taken  into  account  when  the  analy- 
sis is  prepared  at  the  end  of  each  month.  The  work  may 
then  be  simplified  by  doing  part  of  it  daily  or  weekly  as  the 
labor  reports  are  received  from  departments,  so  that  when 
the  end  of  the  month  arrives,  there  is  no  big  accumulation  of 
reports.  This  plan  of  analyzing  labor  reports  at  the  end  of 
the  cost  period  might  have  its  advantages  in  a  small  plant, 
but  if  permitted  in  a  large  one,  the  presentation  of  the  financial 
and  factory  statements  at  the  end  of  each  cost  period  might 
be  delayed. 

Analysis  of  Charges  to  Jobs 

Another  function  of  a  pay-roll  analysis  is  to  show  the 
charges  to  the  various  jobs  and  articles  manufactured,  thus 
summarizing  the  charges  to  cost  sheets  and  cost  records  as 
well  as  serving  the  purpose  of  an  accounting  summary  record. 
When  this  procedure  is  followed,  the  labor  reports,  instead  of 
being  posted  directly  to  the  cost  sheets,  are  entered  upon  the 


CHARGING   FACTORY   EXPENDITURES  265 

pay-roll  summary.  This  provides  a  proof  of  the  correctness 
of  the  total  amount  of  labor  charged  to  jobs,  orders,  or  articles, 
as  this  total  should  equal  the  total  productive  labor. 

Process  Pay-Roll  Summary 

Under  the  process  method  of  cost-finding,  the  labor 
charges  are  often  analyzed  upon  a  pay-roll  summary  for  the 
purpose  of  ascertaining  the  labor  charges  to  the  various  proc- 
esses, the  entry  being  made  in  total  at  the  end  of  a  cost  period 
to  a  process  cost  record  or  account.  This  method  eliminates 
the  posting  of  details  directly  to  the  process  cost  record  and 
furnishes  a  proof  of  the  correctness  of  the  labor  charges. 

Summary  of  Salaries 

So  far,  the  discussion  has  dealt  with  the  productive  and 
non-productive  wages  of  factory  employees.  The  salaries 
paid  to  the  superintendent,  foremen,  and  other  supervisors  are 
often  entered  on  a  separate  pay-roll  record,  usually  because  this 
information  is  confidential.  This  record  is  so  simple  in  char- 
acter that  the  analysis  of  the  charges  to  departments  can  be 
readily  ascertained.  Salaries  paid  to  office  employees  should 
also  be  kept  in  a  separate  pay-roll  record,  as  these  must  be 
apportioned  over  the  selling  and  administrative  expense  ac- 
counts and  the  factory  overhead  accounts.  To  sum  up,  the 
pay-roll  may  be  analyzed  in  three  sections :  ( i )  productive 
and  non-productive  wages;  (2)  salaries  of  superintendents, 
foremen,  and  supervisors;  and  (3)  salaries  of  the  clerks  em- 
ployed in  the  selling,  administrative,  and  factory  departments. 


CHAPTER  XVII 

COST  SUMMARIZING  RECORDS— TRANSFERS 
WITHIN  THE  FACTORY 

Kinds  of  Records 

In  every  cost  system  the  movement  of  material  and  the 
transfer  of  labor  between  departments  must  be  summarized  on 
suitable  records,  and  to  accomplish  this  some  or  all  of  the 
records  listed  below  serve  a  necessary  purpose : 

1.  Summary  of  material  requisitions. 

2.  Summary  of  departmental  material  used. 

3.  Summary  of  stock  transfers. 

4.  Summary  of  departmental  transfers  of  material. 

5.  Summary  of  departmental  transfers  of  labor. 

6.  Summary  of  shop  order  costs. 

7.  Summary  of  defective  work  costs. 

8.  Summary  of  factory  overhead  distribution. 

9.  Summary  of  production. 

Summary  of  Material  Requisitions 

Material  requisitions  should  be  summarized  to  determine 
the  amounts  to  be  credited  to  the  controlling  material  and  sup- 
plies accounts,  and  charged  to  various  departmental  material 
and  expense  accounts.  These  charges  include  direct  material 
and  miscellaneous  supplies  chargeable  to  factory  overhead. 
Any  miscellaneous  supplies  applicable  to  the  selling  and  admin- 
istrative departments  should  also  be  shown  on  the  summary. 

Where  the  classification  of  general  and  factory  accounts 
is  not  extensive,  a  summary  of  material  requisitions  may  be 
made  upon  a  columnar-ruled  sheet,  as  in  Form  57.  Requisi- 
tions may  be  entered  on  the  summary  in  detail  or  in  daily  totals 

266 


TRANSFERS    WITHIN    THE    FACTORY 


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268  COMPILING  AND  SUMMARIZING  COSTS 

obtained  on  an  adding  machine.  The  distribution  to  the 
accounts  should  be  proved  with  the  amount  in  the  total  column. 

The  summary  is  usually  prepared  after  the  material  requi- 
sitions have  been  priced  and  entered  upon  the  stock  records  and 
before  postings  are  made  to  cost  sheets,  though  the  work  may 
be  done  after  postings  are  made  to  the  cost  sheets  and  other 
cost  records.  Requisitions  should  then  be  checked  to  see  that 
none  are  missing.  In  some  instances  it  may  be  necessary  to 
have  separate  summary  columns  for  credit  and  charge  trans- 
actions, especially  if  there  are  several  stock-rooms,  when  a 
separate  credit  will  have  to  be  passed  to  each  stock-room  ac- 
count for  the  material  requisitioned  therefrom.  Or  it  may  be 
more  practicable  to  provide  separate  sheets  for  credit  trans- 
actions affecting  stock-room  accounts  and  charge  transactions 
affecting  departmental  material  and  expense  accounts. 

Where  the  classification  of  the  accounts  is  elaborate,  a 
summary  of  material  requisitions  may  be  prepared  upon  the 
distribution  sheet  (Form  53)  already  described.  A  separate 
sheet  would  then  be  used  for  each  account  affected  both  as  to 
credit  and  charge  transactions,  the  detailed  items  or  the  daily 
totals  being  entered  upon  these  sheets.  The  totals  should  be 
proved  each  day  and  the  sum  totals  ascertained  at  the  end  of 
the  cost  period.  These  should  be  posted  to  the  credit  of  the 
stock-room  controlling  accounts  in  the  factory  or  general 
ledger  and  to  the  debit  of  the  departmental  material  and  ex-» 
pense  accounts.  If  separate  factory  and  general  ledgers  are 
kept,  care  must  be  exercised  to  see  that  the  proper  control  is 
established  for  the  transactions  which  affect  each  ledger. 

All  material  withdrawn  from  stock  is  not  necessarily 
applicable  to  a  definite  job,  order,  or  article.  Some  of  it  may 
be  stored  in  the  operating  department  to  be  used  in  small  quan- 
tities as  required.  Therefore,  when  summarizing  the  material 
withdrawals  from  stores,  it  may  be  necessary  to  differentiate 
between  material  charges  applicable  to  definite  jobs  or  orders, 


TRANSFERS    WITHIN    THE    FACTORY  269 

and  material  which  is  being  stored  in  a  sub-stock-room  or 
operating  department.  Under  some  conditions  the  material 
requisitioned  for  each  job  is  summarized  upon  separate  sheets 
or  cards  before  an  entry  is  made  upon  the  cost  sheet.  Where 
numerous  small  parts  are  used  in  the  manufacture  of  large 
articles  and  the  requisitions  show  quantities  only,  these  are 
first  summarized  and  then  priced  at  their  average  cost  before 
the  cost  sheet  entry  is  made. 

Summary  of  Departmental  Material  Used 

The  summary  of  departmental  material  used  is  similar  to 
the  summary  of  material  requisitions,  and  the  same  form  may 
be  employed.  The  consumption  of  material  stored  in  operat- 
ing departments  is  recorded  on  departmental  reports  showing 
its  application  to  jobs.  These  reports  are  summarized  to  ascer- 
tain the  totals  to  be  credited  to  departmental  material-stock  ac- 
counts and  charged  to  departmental  work-in-proccess  accounts. 

Summaries  of  Material  Transfers 

Where  several  storerooms  are  operated,  portions  of  the 
material  are  often  transferred  from  one  storeroom  to  another. 
If  such  transfers  are  not  recorded  upon  the  regular  detailed 
material  requisitions  and  in  that  way  entered  upon  the  sum- 
mary of  material  requisitions,  provision  must  be  made  for 
summarizing  them  on  a  separate  record.  This  would  take  the 
form  of  a  summary  of  material  requisitions,  the  totals  being 
credited  and  charged  to  the  stock-room  accounts  afifected. 

In  the  same  way,  if  transfers  of  material  from  one  oper- 
ating department  to  another  are  numerous,  they  should  be  sepa- 
rately recorded  on  a  summary  the  totals  of  which  are  charged 
or  credited  to  departments  receiving  or  transferring  material. 

Summary  of  Departmental  Transfers  of  Labor 

Employees  may  be  transferred  temporarily  from  one  de- 
partment to  another  when  orders  are  rushed  or  a  department  is 


270  COMPILING  AND  SUMMARIZING  COSTS 

short-handed.  These  transfers  should  be  recorded  upon 
detailed  labor  transfer  reports  and  provision  made  for  sum- 
marizing the  reports  so  tha>  the  totals  may  be  credited  and 
charged  to  the  proper  departmental  labor  accounts.  Such  a 
summary  can  be  readily  prepared  on  a  columnar  sheet  such  as 
the  one  used  in  summarizing  material  requisitions  (Form  57). 
The  summary  should,  of  course,  include  only  changes  of 
a  temporary  character.  Any  permanent  transfers  should  be 
shown  on  all  necessary  records,  the  employee's  number  and  the 
position  of  his  name  upon  the  pay-roll  being  changed. 

Summary  of  Shop  Order  Costs 

Shop  order  costs  for  repairs  and  maintenance  should  be 
summarized  separately  from  production  costs  for  the  reason 
that  they  are  an  overhead  charge  to  departments.  Such  sum- 
maries are  usually  prepared  from  the  cost  sheets  of  repair  jobs 
on  a  standard  columnar  sheet.  If  separate  costs  are  not  kept 
for  each  repair  order,  the  summary  may  be  prepared  from 
standing  orders — in  either  case  showing  the  total  material, 
labor,  and  overhead  charges  to  overhead  accounts  and  the 
credits  to  departmental  work-in-process  accounts  of  depart- 
ments. In  small  plants  a  summary  of  shop  order  costs  may  be 
prepared  directly  from  the  detailed  material  and  labor  reports 
instead  of  from  the  cost  sheets,  provision  being  made  for  over- 
head. 

Form  58  is  used  to  summarize  shop  order  costs.  Each 
shop  order  should  be  entered  separately  after  the  costs  are  as- 
certained, although  where  the  orders  for  repairs  are  numerous, 
it  may  be  more  convenient  to  enter  daily  totals  obtained  by 
means  of  an  adding  machine.  The  form  shows  the  total  mate- 
rial, labor,  and  overhead  costs  to  be  credited  to  the  depart- 
ments which  work  upon  the  orders.  If  the  repairs  are  all 
made  in  one  mechanical  or  millwright  department,  this  depart- 
ment would  receive  the  entire  credit  for  all  work  done.     The 


TRANSFERS    WITHIN    THE    FACTORY 


271 


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charges  to  the  repair  and  maintenance  accounts  should  be 
proved  with  the  total  credits.  The  postings  from  this  record 
are  made  to  the  ledger  accounts  shown  in  the  headings. 

In  small  plants  it  may  not  be  necessary  to  enter  the  mate- 
rial, labor,  and  overhead  costs  separately,  in  which  case  one 
column  only  is  required  for  ascertaining  the  credits.  In  large 
plants  a  separate  form  may  be  used  for  each  department,  such 
as  the  distribution  sheets  described  in  the  previous  chapter. 

Summary  of  Defective  Work  Costs 

A  valuable  administrative  record  to  present  to  the  man- 
agement is  a  summary  of  costs  of  defective  work,  prepared 
from  the  cost  sheets  of  this  class  of  production,  the  totals  of 
which  are  credited  to  the  department  doing  the  work.  Col- 
umns provide  for  charges  to  the  various  stock  or  expense  ac- 
counts, depending  upon  the  disposition  of  the  defective  work. 
Such  a  record  is  handled  practically  in  the  same  manner  as  the 
summary  of  shop  order  costs,  and  may  be  combined  with  this 
summary  or  that  of  production,  or  may  be  made  out  separately. 

Summary  of  Factory  Overhead  Distribution 

The  department  overhead  items  are  obtained  from  the  fol- 
lowing cost  summaries,  already  described :  ( i )  purchase  rec- 
ords or  voucher  register,  supplemented,  when  necessary,  with 
analysis  sheets;  (2)  pay-roll  or  pay-roll  analysis;  (3)  sum- 
maries of  material  requisitions  and  transfers;  (4)  summary  of 
departmental  transfers  of  labor;  (5)  summary  of  defective 
work  costs;  (6)  summary  of  shop  order  costs. 

After  gathering  the  data  upon  the  summaries  so  far  de- 
scribed and  posting  the  figures  to  the  factory  accounts,  the 
next  step  is  to  prepare  a  summary  of  factory  overhead  distribu- 
tion for  each  department.  The  data  for  these  summaries  are 
taken  from  factory  ledger  accounts  and  distributed  thus: 


TRANSFERS    WITHIN    THE    FACTORY 


273 


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1 

274 


COMPILING  AND   SUMMARIZING  COSTS 


1.  Items  of  overhead  chargeable  to  non-productive  de- 

partments are  summarized  and  distributed. 

2.  The  overhead  of  each  non-productive  department  is 

distributed  to  the  productive  departments. 

3.  The  items  of  overhead  chargeable  to  the  productive 

departments  are  summarized  in  order  to  charge 
the  total  to  departmental  work-in-process  accounts. 

The  overhead  distribution  summaries  are  usually  prepared 
upon  columnar-ruled  sheets  (Form  59).  The  items  are  placed 
at  the  left,  the  form  is  headed  with  the  months  or  cost  periods, 
and  the  totals  are  charged  and  credited  to  the  accounts  affected. 
Chapter  XX  discusses  the  posting  of  these  items. 

Summary  of  Production 

Before  designing  a  form  for  summarizing  the  information 
as  to  production,  consideration  must  be  given  to  the  system  in 


SUMMARY   OF   PRODUCTION 

Department 

For 19 

No 

Date 

OR 

Report 
No. 

Remarks 

V 

Summary  of  Costs 

Total 

Material 

Labor 

Overhead 

Form  60.    Summary  of  Production     (Size,  8  x  11.) 


TRANSFERS    WITHIN    THE    FACTORY 


275 


use  and  to  the  method  of  crediting  production.  The  product 
may  be  credited  to  the  departmental  work-in-process  accounts 
and  charged  to  the  various  stock  accounts,  after  the  work  is 
completed,  or  as  it  is  finished  in  one  department  and  trans- 
ferred to  another,  to  which  it  is  charged. 

The  summary  of  production  (Form  60)  is  prepared  from 
the  production  reports  and  cost  sheets,  entries  being  compiled 
daily  or  at  the  end  of  the  month.  If  compiled  daily,  the 
monthly  summary  should  be  on  a  separate  sheet. 

Another  summary  form  may  be  used  to  record  the  charges 
to  the  stock  accounts  when  production  is  credited  to  the  work 
in  process  accounts,  the  form  consisting  of  a  columnar  sheet 
headed  with  the  names  of  the  stock-room  accounts  to  be 
charged.  The  total  of  all  credits,  as  shown  by  the  summary 
of  production,  must  be  in  agreement  with  this  additional  rec- 
ord, thus  proving  the  clerical  accuracy  of  the  work. 

Where  there  are  many  departmental  work-in-process  ac- 
counts or  numerous  stock-room  accounts,  a  separate  summary 
of  production  may  be  made,  one  for  each  account,  the  pro- 
cedure being  the  same  as  with  the  distribution  records. 

In  process  cost-finding,  a  production  summary  for  each 
or  all  classes  of  product  is  often  prepared  showing  quantities 
only.  Under  these  circumstances  the  quantities  charged  to 
stock  should  be  proved  before  the  costs  are  figured.  The  total 
costs  entered  upon  each  form  are  charged  to  a  stock  account, 
and  the  material,  labor,  and  overhead  costs  are  credited  to  de- 
partmental work-in-process  accounts.  The  kind  of  product, 
the  number  of  the  operating  departments,  and  the  method  of 
cost-finding  determine  the  form  of  a  production  summary. 

A  final  point  is  that  the  cost  of  equipment  or  machinery 
made  in  the  factory  should  not  be  included  in  the  regular  pro- 
duction. The  credits  to  departmental  accounts  for  this  work 
should  be  entered  upon  a  separate  production  summary,  and 
the  costs  charged  to  suitable  plant  asset  accounts. 


CHAPTER  XVIII 

COST  SUMMARIZING  RECORDS— SALES,  COST  OF 
SALES,  AND  JOURNAL  ENTRIES 

Elinds  of  Records 

Up  to  this  point,  consideration  has  been  given  to  the 
reports  covering  the  department  charges  for  material,  labor, 
and  overhead,  and  the  summaries  covering  the  transfers  within 
the  factory.  Provision  must  be  made  for  crediting  the  factory 
with  the  product  sold.  The  necessary  steps  in  this  connection 
entail : 

1.  Recording  and  costing  the  sales. 

2.  Preparing  the  sales  summary  and  cost  of  sales  sum- 

mary. 

3.  Recording  and  costing  returns. 

4.  Preparing  returns  summary  and  cost  of  returns  sum- 

mary. 

5.  Crediting  the  costs  chargeable  to  the  administrative 

or  selling  departments. 

Shipping  Records,  Sales  Records,  and  Costing  Sales 

The  shipment  of  the  product  after  its  sale  may  be  covered 
by  the  shipping  order,  which  record  is  often  a  carbon  copy  of 
the  factory  order.     (See  Form  61.) 

When  it  is  necessary  to  issue  more  definite  shipping  in- 
structions, as  for  instance  when  part  shipments  are  made,  the 
back  of  the  form  may  provide  spaces  for  this  information. 
The  shipping  record  may  also  be  combined  with  the  billing  and 
costing  sales  record.  When  this  is  done,  the  original  copy  or 
customer's  invoice,  and  the  second  copy  which  may  be  the  sales 
record,  are  usually  held  in  the  office  until  the  merchandise  is 

276 


SALES   COSTS   AND   JOURNAL   ENTRIES 


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reported  shipped  on  the  third  copy.  If  part  shipments  are 
made,  a  note  can  be  placed  on  the  bottom  of  the  invoice  stat- 
ing that  all  items  not  extended  are  on  back  order  and  will  be 
shipped  at  a  later  date.  If  the  foregoing  procedure  is  followed 
when  the  three  copies  are  made,  no  items  should  be  extended 
until  the  merchandise  is  shipped,  and  then  only  for  those  items. 
If  any  remain  on  back  order,  a  new  set  of  forms  should  be  pre- 
pared to  cover  their  shipment,  the  procedure  being  the  same. 

In  the  handling  of  the  sales  record  copy,  provision  may 
be  made  for  entering  thereon  the  cost  of  sales  unless  there  is 
an  objection  to  disclosing  the  profit.  If  so,  a  fourth  copy 
may  be  prepared  and  marked  "Cost  of  Sales  Record,"  to  be 
used  in  costing  the  items  sold. 

The  above  method  of  combining  shipping  instructions 
with  customer's  invoice,  sales  record,  and  cost  of  sales  record 
is  illustrated  in  Form  62. 

Another  method  of  handling  confidential  cost  of  sales  in- 
formation is  to  use  an  extra  detachable  column,  for  recording 
the  cost  information  upon  the  sales  record.  If  the  sheets  are 
perforated  between  the  sales  and  the  cost  of  sales  columns,  the 
latter  can  be  detached  after  the  cost  summaries  are  obtained 
and  before  the  sales  sheets  are  placed  in  a  binder  or  filed  in 
some  other  suitable  way. 

Under  some  circumstances  the  costing  of  the  sales  cannot 
be  combined  with  the  billing  and  shipping  operations,  a  case 
in  point  being  where  the  quantities  shipped  are  classified  and 
summarized  and  the  cost  is  obtained  at  the  end  of  the  period. 
When  this  is  the  practice,  an  ordinary  columnar  sheet  headed 
with  the  names  of  the  articles,  or  a  separate  sheet  for  each  ar- 
ticle shipped,  is  used  to  summarize  the  quantity  shipped  as  en- 
tered on  the  detailed  sales  records.  Where  quantities  are  ■ 
compiled  for  the  purpose  of  costing  sales,  the  figures  should 
always  be  proved.  Unless  this  is  done,  the  cost  information 
and  statements  based  thereon  may  be  inaccurate.     The  infor- 


SALES    COSTS    AND   JOURNAL   ENTRIES  281 

mation  as  to  cost  of  sales  is,  of  course,  obtained  from  either 
the  cost  sheets  of  special  orders,  or  the  stock  records  if  these 
show  cost  values.  Where  standard  products  are  carried  in 
stock,  the  average  costs  may  be  taken  directly  from  the  stock 
records  or  cost  sheets  showing  cost  averages. 

In  process  cost-finding,  if  cost  values  are  not  entered  on 
the  finished  stock  records,  provision  should  be  made  for  cost- 
ing each  lot  or  shipment.  The  cost  of  the  same  product  manu- 
factured at  different  times  would  often  vary.  If  the  costs  of 
the  articles  most  recently  manufactured  are  not  used,  or  if  no 
check  is  kept  on  the  cost  of  each  lot  shipped,  the  average  cost 
of  the  articles  produced  should  be  entered  as  the  cost  of  sales. 
The  finished  stock  records  can  generally  be  used  for  showing 
average  costs,  for  the  reason  that  in  ascertaining  average  costs 
the  inventories  at  the  beginning  and  end  of  the  period  must  be 
considered,  as  well  as  the  production  and  shipments  during 
previous  periods. 

Sales  Summary 

A  sales  summary  (Form  6^)  usually  takes  the  form  of  a 
loose-leaf  columnar-ruled  sheet  unless  the  sales  classifications 
are  so  numerous  as  not  to  permit  the  analysis  appearing  on  one 
sheet.  In  this  case  the  sheets  would  be  headed  with  the  names 
of  the  accounts  to  be  credited,  and  the  total  amount  of  sales 
would  be  shown  separately.  The  total  of  each  classification 
should  be  credited  to  an  appropriate  sales  account  in  the  gen- 
eral ledger  and  the  total  sales  posted  to  the  Accounts  Receivable 
controlling  account;  or  one  sales  account  may  be  kept  in  the 
general  ledger,  with  a  supporting  record  showing  the  analysis 
of  sales  by  classes.  Customers'  invoices  may  be  entered  on 
the  sales  summary  separately  or  in  daily  totals  compiled  by 
means  of  an  adding  machine. 

It  should  be  understood  that  the  use  of  these  sales  sum- 
mary records  presupposes  many  kinds  of  product.     Where  the 


282 


COMPILING  AND  SUMMARIZING  COSTS 


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SALES    COSTS    AND   JOURNAL   ENTRIES  283 

classification  is  simple,  the  totals  to  be  credited  to  the  various 
sales  accounts  can  be  ascertained  from  an  ordinary  sales  book. 

Cost  of  Sales  Summary 

The  cost  of  sales  summary  is  prepared  in  the  same  way 
as  the  sales  summary,  the  procedure  in  classifying  the  product 
and  ascertaining  the  totals  to  be  charged  to  the  cost  of  sales 
accounts  being  identical.  The  total  amount  should  be  credited 
to  a  finished  stock  account  or  Factory  Ledger  account  as  kept 
in  the  general  ledger.  Under  some  conditions  quantities  only 
are  compiled  upon  analysis  sheets,  and  the  cost  of  sales  sum- 
mary is  prepared  as  soon  as  costs  are  obtained.  In  either  case 
the  cost  of  sales  summary  takes  the  form  of  a  columnar  sheet 
or  separate  sheets,  as  the  case  requires. 

Return  Credit  Records 

When  merchandise  is  returned  by  a  customer  and  credit 
is  sent  to  him,  three  copies  of  the  credit  memo  (Form  64)  are 
made  out  and  used  as  follows : 

1.  The  original  sent  to  the  customer  shows  that  credit 

has  been  allowed  for  the  merchandise  returned. 

2.  The  second  copy  is  used  for  posting  the  credit  and  as 

a  basis  for  ascertaining  the  total  credits  allowed 
customers. 

3.  The  third  copy  serves  as  a  cost  of  returns  record. 

Where  special  allowances  are  made  to  customers,  credits 
must  also  be  passed  and  reports  prepared  so  that  this  informa- 
tion may  be  properly  recorded.  As  these  items  are  usually 
deductions  from  the  sales  prices  and  have  nothing  to  do  with 
costs,  they  should  be  separately  recorded  and  not  included  as 
part  of  the  returns  record.  This  necessitates  two  credit 
records,  one  for  merchandise  returned  showing  both  sales  and 
cost  values,  the  other  an  allowance  or  sales  deduction  record. 


284 


COMPILING  AND  SUMMARIZING  COSTS 


{Ortginat)         ^jj^  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

CREDIT  MEMORANDUM 

Credit C.  M.  No 

Address Date 

1 

Quantity 

Description 

Price 

Amount 

{Duplicate) 


Credit 

Address.. 


OFFICE  RECORD  COPY 
CREDIT  MEMORANDUM 


C.  M.  No., 
Date 


Quantity 


Description 


Price 


Amount 


Approved Charge  Account  No.. 

Summarized Charge  Accotmt  No.. 


Form  64.    (a)  Cost  of  Returns  Record  Combined  with  Customer's  Credit 
Memo  and  Office  Record  Memo.     (Size,  9  x  6.) 


SALES   COSTS   AND   JOURNAL  ENTRIES  285 


{Triplicate) 

COST  OF  RETURNS  RECORD 

Credit C.  M.  No 

Address Date 

1 

Quantity 

Description 

Cost 

Total 

Summarized Credit  Account  No... 

Credit  Account  No... 
Stock  Record  Entry Charge  Account  No.. 

Charge  Account  No.. 


Form  64.     (b)  Cost  of  Return  Records  Combined  with  Customer's  Credit 
Memo  and  Office  Record  Copy. — Continued. 

Returns  Summary  and  Cost  of  Returns  Summary 

The  returns  summaries — one  for  the  amount  of  the  re- 
turns allowed  customers  and  one  for  the  cost  of  these  returns 
— are  prepared  in  the  same  way  as  the  summaries  of  sales  and 
cost  of  sales.  They  may  take  the  form  of  a  columnar  sheet 
for  all  classifications  or  a  separate  sheet  for  each  class  of  prod- 
uct, as  already  described.  By  means  of  these  summaries  the 
total  of  all  returns  is  credited  to  the  customers'  controlling  re- 
turns accounts,  and  the  detailed  totals  are  charged  to  the  sales 
accounts  which  have  been  credited  with  the  merchandise 
shipped.  The  cost  of  the  returns  is  charged  to  the  finished 
stock  accounts,  or  factory  ledger  account,  total  credits  being 
passed  to  the  proper  cost  of  sales  account.  Allowances  are 
charged  to  an  allowance  account  if  it  is  not  possible  to  analyze 
and  deduct  them  from  the  proper  sales  account. 


286  COMPILING  AND  SUMMARIZING  COSTS 

Costs  and  Sales 

When  it  is  possible  to  combine  the  sales  and  cost  records, 
including  the  summaries,  this  may  be  done.  Such  a  combined 
record  (Form  65),  known  as  an  "Analysis  of  Sales  and  Costs" 
or  "Register  of  Sales  and  Costs,"  may  be  ruled  to  meet  the 
requirements  of  each  concern,  but  should  provide  columns 
for  showing  the  invoice  number,  name  of  customer,  amount  of 
sale,  cost  of  sale,  and  the  analysis  of  the  sales  and  costs  by 
product  classifications.  If  invoices  are  so  numerous  as  to  re- 
quire entry  in  daily  totals,  the  invoice  number  and  name  of 
customer  columns  would  be  eliminated. 

An  advantage  of  this  record  is  that  it  shows  the  sales  and 
costs  in  parallel  columns,  and  therefore  it  guards  against  the 
error  of  crediting  the  sales  to  one  account  and  charging  the 
costs  to  a  different  product  classification  account.  When  the 
sales  summary  is  prepared  separately  from  the  cost  of  sales 
summary,  and  no  check  is  installed  to  see  that  the  classification 
both  as  to  sales  and  costs  is  in  agreement,  it  may  be  found 
that  sales  are  classified  in  one  way  and  costs  in  another.  Such 
errors  would  result  in  sales  appearing  as  part  of  the  totals 
against  which  no  costs  are  charged,  or  costs  may  appear  for 
some  product  classification  against  which  no  sales  are  credited. 
Therefore,  whenever  the  sales  and  cost  of  sales  summaries  are 
prepared  separately,  a  comparison  should  be  made  of  the  orig- 
inal records  to  see  that  the  name  or  symbol  of  the  account  to  be 
credited  or  charged  is  alike  for  both  the  sales  record  and  cost 
of  sales  record.  When  detailed  analyses  are  made  on  exten- 
sive forms,  errors  are  apt  to  occur  by  inserting  items  in  wrong 
columns. 

Besides  receiving  credit  for  the  cost  of  sales,  the  factory 
should  be  credited  for  the  cost  of  all  work  which  it  does  for 
the  benefit  of  the  administrative  and  selling  departments.  For 
example,  repairs  in  these  departments  or  miscellaneous  supplies 
of  stationery  kept  in  one  stock-room  for  all  business  require- 


SALES   COSTS   AND  JOURNAL  ENTRIES 


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288  COMPILING  AND  SUMMARIZING  COSTS 

ments  and  withdrawn  by  these  departments,  should  be  credited 
to  the  factory  stock-room  accounts  and  charged  to  the  proper 
selling  and  administrative "  expense  accounts.  These  credits 
for  costs  and  miscellaneous  supplies  would  be  obtained  from 
the  summaries  previously  described,  such  as  production  re- 
ports and  the  summary  of  material  requisitions. 

Journal  Entries 

To  avoid  rewriting  a  long  series  of  journal  entries  at  the 
end  of  each  cost  period,  postings  should  be  made  directly  from 
summaries,  and,  except  in  rare  cases,  it  should  not  be  neces- 
sary to  journalize  the  totals  for  postings  to  factory  and  general 
ledger  accounts.  Entries  adjusting  discrepancies  and  items  of 
an  extraordinary  character  should,  however,  be  journalized  in 
the  usual  way.  For  this  purpose,  a  two-column  factory  jour- 
nal may  be  used  and  kept  distinct  from  the  general  journal;  or 
factory  ledger  columns  may  be  inserted  in  the  general  journal 
for  the  purpose  of  recording  the  information  which  affects  the 
factory  ledger  accounts.  This  is  the  ordinary  type  of  book- 
keeping record  and  as  such  requires  no  further  description. 

Journal  Vouchers  and  Standing  Journal  Entries 

Instead  of  a  bound  book,  a  journal  voucher  (Form  66) 
is  sometimes  used  for  the  purpose  of  recording  the  summaries 
and  adjusting  entries.  One  advantage  of  this  loose-leaf 
method  lies  in  the  fact  that  journal  entries  may  then  be  made 
either  in  the  general  office  or  factory  cost  office,  and  after  the 
information  is  posted  to  the  proper  accounts  the  vouchers  can 
be  filed  in  a  loose-leaf  binder. 

Still  another  method  of  handling  closing  entries  is  by 
means  of  a  sheet  on  which  the  "Standing  Journal  Entries,"  as 
they  are  called,  are  covered  for  the  year.  In  factory  cost 
accounting,  much  the  same  entries  are  made  and  the  same  ac- 
counts are  affected  from  period  to  period,  the  debits  and  credits 


SALES   COSTS   AND  JOURNAL  ENTRIES 


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varying  only  as  to  amounts.  Therefore,  a  standing  journal 
entry  sheet  may  be  used,  as  shown  in  Form  67.  At  the  ex- 
treme left  the  names  of  the  accounts  or  account  numbers  to  be 
debited  or  credited  appear,  and  the  columns  are  headed  with 
the  months  of  the  year  for  the  purpose  of  inserting  the  totals 
for  each  cost  period.  Provision  is  also  made  for  a  posting 
check. 

Besides  eliminating  the  necessity  for  rewriting  the  names 
of  the  accounts,  these  standing  journal  entry  forms  have  other 
advantages.  When  all  summaries  are  journalized,  the  form 
provides  a  means  of  knowing  that  every  entry  for  the  period 
has  been  covered.  Also,  as  a  comparison  of  the  current  trans- 
actions with  those  of  the  previous  months  can  readily  be  made, 
any  large  discrepancies  may  be  noted  before  posting  to  the 
accounts.  Finally,  the  standing  journal  form  is  a  valuable  aid 
to  the  preparation  of  factory  statements,  as  all  the  information 
is  arranged  in  columnar  form  for  each  period.  Totals  can  thus 
be  readily  obtained  or  the  figures  of  one  period  can  be  com- 
pared with  those  of  another. 

Chart  of  Cost  Summarizing  Records 

Form  68  shows  in  concrete  form  the  cost  summarizing 
records  described  in  this  and  the  preceding  chapters.  It  should 
be  noted  that  the  distribution  record,  which  was  discussed  in 
Chapter  XVI,  may  be  used  for  all  summary  purposes.  The 
sheets  of  each  summary  may  be  classified  in  sections  in  a  loose- 
leaf  binder,  each  section  being  kept  separate  by  means  of  tab 
indexes,  thus  providing  a  means  for  ready  reference.  The 
folios  of  each  section  should  be  numbered  for  posting  purposes. 


Part  IV — ^Controlling  the  Cost  Records 


CHAPTER  XIX 


GENERAL  LEDGER  CONTROL  OF  FACTORY 
ACCOUNTS 

The  Control  of  Cost  Records 

Cost  records  are  controlled  by  the  financial  accounts  in 
two  ways :  Postings  are  made  from  the  cost  summarizing 
forms  described  in  the  preceding  chapters,  ( i )  to  the  general 
ledger  or  (2)  to  factory  accounts  in  a  subsidiary  factory  ledger 
as  well  as  to  certain  of  the  controlling  accounts  in  the  general 
ledger.  The  different  methods  of  control  are  explained  in 
this  and  the  following  chapter. 

To  illustrate  the  general  method  of  controlling  the  cost 
records  by  means  of  the  general  accounting  records,  the  fol- 
lowing balance  sheet  is  presented  as  a  starting  point.  It  is 
assumed  that  the  books  of  the  Brown  Manufacturing  Com- 
pany show  the  following  financial  condition  at  January  i, 
1918: 

The  Brown  Manufacturing  Company 
Balance  Sheet,  January  i,  1918 


Assets 

Cash  $  38,000.00 

Accounts    Receivable.  174,000.00 

Notes  Receivable 20,000.00 

Merchandise       Inven- 
tory    226,700.00 

Machinery    arid    Fix- 
tures    35,000.00 


Total  Assets $493,700.00 


Liabilities 

Notes  Payable   $  25,000.00 

Accounts  Payable  . . .     64,000.00 


Total  Liabilities $  89,000.00 

Capital  Stock 350,000.00 

Surplus 54,700.00 


Total    Liabilities    and- 


Capital $493,700.00 


293 


294 


CONTROLLING  THE  COST  RECORDS 


Such  a  balance  sheet  may  be  prepared  from  the  general 
ledger  or  private  ledger  accounts  at  the  end  of  a  fiscal  period. 
The  above  accounts  show  the  condition  as  to  assets,  liabilities, 
and  capital  and  all  appear  in  the  general  ledger. 

Income  and  Expense  Accounts 

Accounts  must  also  be  provided  to  show  the  details  of  in- 
come and  expenses,  and  would  include  the  following: 

1.  Sales 

2.  Merchandise  Purchases 

3.  Productive  Labor 

4.  Factory  Indirect  Expenses 

5.  Selling  Expenses 

6.  Administrative  Expenses 

In  order  to  simplify  the  discussion,  and  as  the  procedure 
would  be  the  same  regardless  of  the  number  of  accounts,  it 
is  assumed  that  only  one  account  is  kept  with  each  of  the 
items  listed  above.  In  actual  practice,  however,  there  might 
be  several  sales  accounts  to  show  the  amount  of  sales  of  the 
different  kmds  of  product,  several  accounts  showing  the  dif- 
ferent kinds  of  purchases,  the  productive  labor  might  not  all 
be  recorded  in  one  account,  and  there  would  be  detailed  ac- 
counts to  record  the  factory  indirect  expenses,  selling  ex- 
penses, and  administrative  expenses. 

Assuming  the  correctness  of  the  foregoing  balance  sheet 
on  January  i,  19 18,  the  first  entries,  indicated  by  the  figure  ( i ) 
in  the  illustrative  accounts  appearing  on  pages  296-298,  are 
those  made  to  record  the  balances  upon  the  ledger  accounts. 

Purchase  Transactions 

The  purchases  are  entered  from  the  invoices  or  from  the 
accounts  payable  vouchers  to  a  purchase  record  or  voucher 
register.  Assume  that  at  the  end  of  the  cost  period  this  record 
shows  total  purchases  of  $65,000,  represented  by: 


GENERAL  LEDGER  CONTROL  295 

Purchases   of   Material $59,000.00 

Invoices  chargeable  to  Indirect  Expense  Accounts 2,500.00 

Invoices  chargeable  to  Selling  Expense 1,500.00 

Invoices  chargeable  to  Administrative  Expense 2,000.00 

These  items  would  be  posted  to  the  various  accounts  affected, 
constituting  entries  (2)  in  the  illustrative  accounts  which  follow. 

Pay-Roil  and  Analysis 

Information  as  to  salaries  and  wages  paid  would  be  ob- 
tained either  from  the  cash  record  supported  by  the  pay-roll 
analysis,  or  from  the  voucher  register  if  the  pay-roll  were 
entered  in  that  record.  In  the  case  under  consideration,  the 
pay  days  are  assumed  to  be  on  the  fifteenth  and  at  the  end 
of  the  month,  and  the  pay-roll  analysis  shows  that  salaries 
and  wages  amount  to  $28,300,  made  up  as  follows : 

Productive   Labor $18,000.00 

Non-Productive  Labor,  including  supervision 4,500.00 

Salesmen's   Salaries    4,300.00 

Administrative   Office   Salaries 1,500.00 

The  postings  of  pay-roll  items  to  their  respective  accounts 
constitute  entries  (3)  and  represent  the  current  charges  for 
labor  and  various  items  of  overhead.  Thus  the  postings 
obtained  from  the  summaries  or  analyses  of  the  purchases  and 
the  analysis  of  the  pay-roll  represent  the  current  factory 
expenditures. 

Sales  Transactions 

Assuming  that  the  total  shipments  during  the  period  are 
entered  on  one  sales  record,  and  that  their  amount  is  $85,000 
for  the  period,  entries  (4)  would  be  made  charging  Accounts 
Receivable  and  crediting  Sales  account  with  this  amount. 

Cash  Transactions 

Assume  that  the  cash  receipts  are  $105,000  and  cash 
payments  $103,300  as  shown  by  the  cash  book,  and  that  these 
totals  are  made  up  as  follows: 


296  CONTROLLING   THE   COST   RECORDS 

Receipts  from  Customers $100,000.00 

Notes  Receivable 5,000.00 

Paid  on  account  of  Notes  Outstanding 10,000.00 

Paid  to  various  Creditors 65,000.00 

Paid  on  account  of  Pay- Roll  during  the  month 28,300.00 

This  information  is  sufficient  for  making  entries  (5)  and  (6), 
entry  (5)  being  for  cash  receipts  and  (6)  for  cash  payments. 
The  discounts  received,  discounts  allowed,  interest  trans- 
actions, and  deferred  items  of  expense  are  omitted  from  con- 
sideration. The  entries  so  far  given  represent  the  usual  trans- 
actions which  need  to  be  summarized  at  the  end  of  the  period, 
any  unusual  transactions  requiring  adjusting  journal  entries 
not  being  considered. 

Ledger  Accounts 

After  posting  these   items  to  the  ledger,   the  accounts 
would  appear  on  that  record  as  follows : 

Cash 


Jan.    I  Balance (i)  $38,000 

31  Sund.  Recpts.  (5)   105,000 


Jan.  31  Sund.  Pay'ts..  (6) $103,300 
Accounts  Receivable 


Jan.    I  Balance (i)$i74,ooo 

31  Sales (4)     85,000 


Jan.  31  Cash (5) $100,000 

Notes  Receivable 


Jan.    I  Balance (i)  $20,000     Jan.  31  Cash    (5)     $5,000 

Merchandise  Inventory 


Jan.    I  Balance ( i )  $226,700 

Machinery  and  Fixtures 


Jan.    I  Balance (i)  $35,000 


GENERAL  LEDGER  CONTROL 
Notes  Payable 


297 


Jan.    31  Cash (6)  $10,000 


Jan.    I  Balance (i)  $25,000 


Accounts  Payable 


Jan.  31  Cash (6)  $65,000 

Pay-Roll  Account 


Jan.    I  Balance (i)   $64,000 

31  Purchases  . . .  (2)     65,000 


Jan.  31  Cash (6)   $28,300 


Jan.  31  Sal.  &  Wages  (3)  $28,300 


Capital  Stock 


Jan.    I  Balance (i)$35o,ooo 

Surplus 


Jan.    I  Balance (i)   $54,700 

Sales 


Jan.  3iAccts.    Rec...(4)  $85,000 
Merchandise  Purchases 


Jan.  31  Purchases     ..(2)   $59,000 

Productive  Labor 


Jan.  31  Cash    (3)  $18,000 

Factory  Indirect  Expenses 


Jan.  31  Purchases  ..  .(2)     $2,500 
31  Cash — Non- 
Prod.   Labor..  (3)       4,500 


Selling  Expenses 


Jan.  31  Purchases  ...  (2)     $1,500 
31  Cash — Sal.    ..(3)       4,300 


298  CONTROLLING   THE   COST   RECORDS 

Administrative  Expenses 


Jan.  31  Purchases  ...(2)     $2,000 
31  Cash — Sal.    . .  (3)       1,500 

A  trial  balance  prepared  from  the  above  ledger  accounts 
at  the  end  of  the  cost  period  would  appear  as  follows : 

The  Brown  Manufacturing  Company 

General  Ledger  Trial  Balance 

January  31,  1918 

1  Cash  $  39,700.00 

2  Accounts  Receivable 159,000.00 

3  Notes   Receivable    15,000.00 

4  Merchandise       Inventory        (balance, 

January  i )    226,700.00 

5  Machinery  and  Fixtures  35,000.00 

6  Notes  Payable   $  15,000.00 

7  Accounts  Payable   64,000.00 

8  Pay-Roll    

9  Capital  Stock  350,000.00 

10  Surplus    54,700.00 

1 1  Sales    85,000.00 

12  Merchandise  Purchases  59,000.00 

13  Productive  Labor   18,000.00 

14  Factory  Indirect  Expense 7,000.00 

15  Selling   Expenses    5,800.00 

16  Administrative  Expenses 3,500.00 


$568,700.00     $568,700.00 

Merchandise  Inventory 

The  above  accounts  show  the  condition  of  the  assets,  lia- 
bilities, capital,  and  surplus,  and  the  transactions  affecting  the 
items  of  income  and  expenses  for  the  period.  The  charges  for 
material,  labor,  and  overhead  have  been  made.  But  as  the 
trial  balance  does  not  include  the  figures  as  to  the  value  of 
the  closing  inventory,  the  cost  of  sales  for  the  period  cannot 
be  ascertained,  and  neither  a  balance  sheet  nor  a  profit  and 
loss  statement  can  be  prepared.    If  the  factory  cost  of  the  sales 


GENERAL  LEDGER  CONTROL  299 

of  $85,000  were  determined,  the  inventory,  material,  labor, 
and  overhead  accounts  could  be  credited  with  the  cost  of  sales 
and  thus  furnish  a  basis  for  ascertaining  the  value  of  the  mer- 
chandise inventory.  Therefore,  it  should  be  noted  that  the 
preparation  of  financial  statements  is  contingent  upon  this 
valuation  and  that  their  accuracy  depends  upon  the  accuracy 
of  the  method  of  obtaining  the  inventory. 

There  are  two  ways  of  ascertaining  the  value  of  the  mer- 
chandise inventory.  The  first  method  is  to  tnake  a  physical 
count  of  the  items  of  merchandise  on  hand,  price  them  at  cost 
and  add  the  extensions.  This  method  is  rarely  resorted  to, 
excepting  at  the  close  of  the  fiscal  year,  because  of  the  clerical 
work  involved. 

The  second  method  is  to  compute  the  total  cost  of  the 
sales  for  the  period,  and  with  these  figures  as  a  basis,  the 
value  of  the  merchandise  inventory  may  be  calculated  as  fol- 
lows: 

To  the  opening  merchandise  inventory  should  be  added 
the  amounts  of  the  merchandise  purchases,  productive  labor, 
and  overhead  cost  for  the  period,  from  which  sum  is  de- 
ducted the  amount  of  the  cost  of  sales.  This  leaves  a  balance 
which  represents  the  value  of  the  merchandise  inventory  at 
the  close  of  the  period.  In  other  words,  the  factory  is  charged 
with  the  opening  inventory  and  all  material,  labor,  and  over- 
head items,  and  receives  credit  for  the  cost  of  the  work  done, 
that  is,  the  cost  of  the  sales  or  shipments  made  during  the 
period.  The  result  would  necessarily  be  the  balance  of  mer- 
chandise on  hand,  to  be  accounted  for. 

Even  in  large  manufacturing  plants  provision  is  not  al- 
ways made  for  the  keeping  of  a  perpetual  inventory.  As  the 
merchandise  on  hand  often  represents  one  of  the  largest  of 
the  assets,  the  importance  of  an  accurate  inventory  needs  to  be 
emphasized.  An  inventory  taken  inaccurately  would  affect 
the  profits  and  may  affect  the  compensation  of  members  of  the 


300  CONTROLLING  THE   COST   RECORDS 

organization.  Therefore,  it  is  important  in  every  system  of 
cost  accounts  that  a  check  be  established  upon  the  movements 
of  the  merchandise  inventory. 

Controlling  Factory  Transactions — First  Method 

So  far  the  discussion  has  covered  the  material,  labor, 
overhead,  and  production  reports,  and  the  summarizing  cost 
records  required  to  ascertain  the  total  charges  and  credits  af- 
fecting the  various  accounts.  The  method  of  controlling  the 
detailed  reports  and  summary  records  so  that  the  figures  con- 
tained therein  may  be  interlocked  with  the  transactions  re- 
corded upon  the  financial  books  may  now  be  considered. 

The  simplest  means  of  controlling  factory  cost  books  is 
to  keep  the  factory  controlling  accounts  on  the  general  ledger 
and  provide  for  recording  therein  the  credit  for  the  cost  of 
factory  production.  To  accomplish  this,  two  additional  ac- 
counts are  opened :  ( i )  Factory  Production  account,  which  is 
credited,  and  (2)  Cost  of  Sales  account,  which  is  debited 
with  the  value  of  the  shipments  made  during  the  period. 

Under  simple  manufacturing  conditions  the  cost  of  the 
sales  might  be  debited  to  the  Sales  account,  if  the  latter  did  not 
contain  any  other  transactions.  But  if  returns  and  allowances 
are  also  debited  to  the  Sales  account,  the  account  would  have 
to  be  analyzed  before  the  proper  information  as  to  the  sales 
and  cost  of  sales  could  be  ascertained.  This  analysis  would 
also  be  necessary  if  the  Sales  account  were  credited  with  any 
adjustments  in  sales  prices  and  cost  of  returns.  Therefore, 
it  is,  as  a  rule,  preferable  to  keep  a  separate  Cost  of  Sales 
account  rather  than  to  have  the  cost  transactions  appear  in  the 
Sales  account. 

To  return  to  the  consideration  of  the  trial  balance  given 
above,  it  is  assumed  that  the  factory  cost  of  the  sales  ($85,000) 
is  $60,000,  which  amount  is  debited  to  Cost  of  Sales  account 
and  credited  to  Factory  Production  account.     The  addition 


GENERAL  LEDGER  CONTROL 


301 


of  these  two  accounts  to  the  foregoing  trial  balance,  as  shown 
below,  gives  all  the  information  required  to  compute  the  value 
of  the  closing  inventory  and  prepare  financial  statements: 

The  Brown  Manufacturing  Company 

General  Ledger  Trial  Balance 

January  31,  1918 

1  Cash  $  39,700.00 

2  Accounts  Receivable    159,000.00 

3  Notes   Receivable    15,000.00 

4  Merchandise     Inventory,    January     i, 

1918 226,700.00 

5  Machinery  and  Fixtures    35,000.00 

6  Notes  Payable   $  15,000.00 

7  Accounts  Payable   64,000.00 

8  Pay-Roll    

9  Capital  Stock 350,000.00 

10  Surplus    54,700.00 

1 1  Sales 85,000.00 

12  Merchandise    Purchases    59,000.00 

13  Productive  Labor   18,000.00 

14  Factory  Indirect   Expenses    7,000.00 

15  Selling  Expenses 5,800.00 

16  Administrative  Expenses 3,500.00 

17  Factory   Production    60,000.00 

18  Cost  of  Sales 60,000.00 

.$628,700.00    $628.700.00 

The  inventory  at  January  31  is  ascertained  in  the  follow- 
ing manner : 

Merchandise  Inventory,  January  i,  1918 $226,700.00 

Factory  Charges : 

Merchandise    Purchases    $  59,000.00 

Productive  Labor   18,000.00 

Factory  Indirect  Expenses 7,000.00 

Total  Factory  Charges   84,000.00 

Total  Merchandise  Inventory  and  Factory  Charges....  $310,700.00 
Factory  Production  (at  cost) 60,000.00 

Merchandise  Inventory,  January  31,   1918 $250,700.00 


302 


CONTROLLING  THE   COST   RECORDS 


A  balance  sheet  and  a  manufacturing  and  profit  and  loss 
statement  prepared  at  the  end  of  January  would  appear  thus : 


The  Brown  Manufacturing  Company 
Balance  Sheet,  January  31,  1918 


Assets 

Cash  $  39,700.00 

Accounts   Receivable.   159,000.00 
Notes    Receivable....     15,000.00 
Merchandise      Inven- 
tory    250,700.00 

Machinery    and    Fix- 
tures       35,000.00 


Total  Assets $499,400.00 


Liabilities 

Notes  Payable   $  15,000.00 

Accounts  Payable. . . .     64,000.00 


Total   Liabilities    ....$79,000.00 

Capital  Stock 350,000.00 

Surplus    54,700.00 

Net   Profit   for   Janu- 
ary       i'5,7oo.oo 

Total    Liabilities    and 


Capital $499,400.00 


The  Brown  Manufacturing  Company 

Manufacturing  and  Profit  and  Loss  Statement 

For  the  month  of  January,  19 18 

Sales $85,000.00 

Cost  of  Sales: 

Merchandise  Inventory,  January  i,  1918    $226,700.00 

Merchandise  Purchases  59,000.00 

Productive  Labor   18,000.00 

Factory  Indirect  Expenses 7,000.00 

Total  Charges   $310,700.00 

Less  Merchandise  Inventory,  January  31, 

1918    250,700.00 


Total  Cost  of  Sales 


60,000.00 


Gross  Profit  $25,000.00 

Expenses : 

Selling  Expenses $    5,800.00 

Administrative  Expenses 3,500.00 


Total  Expenses 


9,300.00 


Net  Profit ". $15,700.00 


GENERAL  LEDGER  CONTROL  303 

Controlling  Factory  Transactions — Second  Method 

If  the  amount  of  a  merchandise  inventory  is  small,  it 
may  be  sufficient  to  use  the  method  of  control  described  in  this 
chapter.  However,  in  most  cases  the  inventory  constitutes  an 
asset  item  of  sufficient  importance  to  require  a  check  or  test 
of  its  valuation  to  be  made  in  detail.  This  is  affected  by 
dividing  the  inventory  into  its  three  natural  divisions  and 
opening  a  controlling  account  with  each  on  the  general  ledger. 
These  three  divisions  are: 

1.  Raw  Material  account 

2.  Work  in  Process  account 

3.  Finished  Stock  account 

The  Raw  Material  account  is  debited  with  the  value  of 
the  opening  inventory  and  the  purchases  during  the  period,  and 
credited  with  the  current  withdrawals  for  manufacturing  pur- 
poses. 

The  Work  in  Process  account  is  debited  with :  ( i )  the 
value  of  the  work  in  process  at  the  beginning  of  the  period  as 
recorded  on  the  uncompleted  cost  sheets;  (2)  the  material 
charges  credited  to  Raw  Material  account;  (3)  the  charges 
for  the  current  productive  labor;  and  (4)  the  total  factory 
overhead  of  the  operating  departments.  It  is  credited  with 
the  cost  of  the  articles  manufactured  and  transferred  to  fin- 
ished stock. 

The  Finished  Stock  account  is  debited  with  the  cost  of 
the  articles  manufactured  and  taken  into  stock,  and  credited 
with  the  shipments  made  during  the  period. 

Thus  the  balances  of  the  three  above  accounts  represent 
the  raw  material,  work  in  process,  and  finished  stock  in- 
ventories and  take  the  place  of  the  four  accounts:  Merchan- 
dise Inventory,  Merchandise  Purchases,  Productive  Labor, 
and  Factory  Production  accounts.  To  illustrate  the  method  of 
controlling  factory  transactions,  when  the  merchandise  inven- 


304  CONTROLLING  THE   COST   RECORDS 

tory  is  analyzed  as  above  it  is  assumed  that  the  amount  of 
$226,700  as  previously  shown  is  analyzed  into : 

Raw  Material  $65,200.00 

Work  in  Process 32,200.00 

Finished   Stock    129,300.00 

$226,700.00 

This  analysis,  which  may  be  made  from  the  current  in- 
ventory sheets,  provides  the  information  for  starting  the  three 
controlling  accounts  illustrated  below  with  entries  designated 
by  the  figure  (i).  Thus,  instead  of  the  total  amount  of  mer- 
chandise inventory  appearing  in  one  account,  it  is  divided  so 
as  to  provide  classified  charges. 

The  source  of  the  remaining  entries  to  the  three  accounts 
may  be  recapitulated :  The  purchases  of  raw  material — 
entry  (2) — are  obtained  from  the  source  already  described. 
The  value  of  the  raw  material  used  in  manufacture — entry 
(3)-;— is  obtained  from  the  summary  of  material  requisitions 
for  the  period.  The  current  productive  labor  charged  to  the 
Work  in  Process  account — entry  (4) — is  taken  from  the  pay- 
roll analysis.  This  entry,  it  should  be  noted,  includes  only  part 
of  the  wages  paid,  the  non-productive  wages  and  salaries  being 
debited  to  the  expense  accounts,  while  the  total  amount  of  all 
salaries  and  wages  is  credited  to  Pay-Roll  account  in  the  same 
manner  as  that  previously  described. 

The  factory  overhead,  as  already  explained,  is  compiled 
in  separate  expense  accounts  which  are  closed  out  to  Fac- 
tory Indirect  Expense  account.  This  account  in  its  turn  is 
closed  out  to  Work  in  Process  account — entry  (5). 

After  the  manufacturing  departments  have  been  charged, 
through  the  Work  in  Process  account,  with  the  various  items 
of  material,  labor,  and  overhead,  provision  must  be  made  for 
recording  the  production  of  these  departments.  To  this  end 
the  detailed  production  reports  which  show  the  articles  manu- 


GENERAL  LEDGER  CONTROL 


30s 


factured  are  summarized  so  as  to  furnish  the  total  cost  of 
production.  Assuming  that  the  total  cost  of  production  as 
reported  on  a  production  summary  is  $40,000,  postings  are 
made  as  shown  in  entry  (6), 

Under  the  method  previously  described,  the  cost  of  sales 
is  shown  to  be  $60,000,  which  amount  is  credited  to  Factory 
Production  and  debited  to  Cost  of  Sales  account.  When  the 
accounts  are  classified  for  the  purpose  of  analyzing  the  mer- 
chandise inventory,  the  cost  of  sales  should  be  credited  to 
Finished  Stock  instead  of  Factory  Production  account,  the 
debit  entry  being  the  same — to  Cost  of  Sales  account.  This 
information  is  posted  directly  from  a  cost  of  sales  summary 
and  furnishes  the  basis  for  recording  entry  (7). 

After  the  postings  have  been  made  under  this  method 
of  control,  the  Raw  Material,  Work  in  Process,  and  Finished 
Stock  accounts  would  appear  upon  the  ledger  as  follows : 

Raw  Material 


1918 

Jan.    I  Balance (i)  $65,200 

31  Purchases  ...  (2)     59,000 


1918 
Jan.  31  Mat'l  Req. 


(3)    $28,000 


Work  in"  Process 


1918 

Jan,    I  Balance (i)   $32,200 

31  Material  ....(3)  28,000 
31  Prod.  Labor  (4)  18,000 
31  Fac.  Ind.  Ex.  (5)       7,000 


1918 
Jan.  31  Production  . .  (6)   $40,000 


Finished  Stock 


1918 

Jan.    I  Balance (i)$i29,300 

31  Production   . .  (6)     40,000 


1918 
Jan.  31  Cost  of  Sales  (7)  $60,000 


A  trial  balance  of  the  ledger  prepared  from  the  accounts 
would  now  read  as  follows : 


306  CONTROLLING  THE  COST   RECORDS 

The  Brown  Manufacturing  Company 

General  Ledger  Trial  Balance 

January  31,  1918 

1  Cash  $  39,700.00 

2  Accounts   Receivable    159,000.00 

3  Notes  Receivable 15,000.00 

5  Machinery   and   Fixtures    35,000.00 

6  Notes  Payable   $  15,000.00 

7  Accounts    Payable    64,000.00 

9  Capital  Stock  350,000.00 

10  Surplus    54,700.00 

1 1  Sales    85,000.00 

15  Selling   Expenses    5,800.00 

16  Administrative  Expenses    3,500.00 

18  Cost  of  Sales  60,000.00 

19  Raw  Material    96,200.00 

20  Work  in  Process 45,200.00 

21  Finished   Stock    109,300.00 

$568,700.00    $568,700.00 

When  the  inventories  are  divided  into  raw  material, 
work  in  process,  and  finished  goods,  and  separate  accounts  are 
kept  with  each  on  the  general  ledger,  the  constituent  parts  of 
the  inventory  are  recorded  among  the  assets  on  the  balance 
sheet.  The  balance  sheet  and  profit  and  loss  statement  may 
be  prepared  from  the  trial  balance  practically  in  the  same  man- 
ner as  the  statements  under  the  first  method;  the  same  pro- 
cedure is  also  followed  in  recording  the  summarized  trans- 
actions. This  is  the  simplest  method  of  controlling  the  cost 
records,  as  the  factory  controlling  accounts  themselves  be- 
come a  part  of  the  financial  system  of  accounts. 

Proving  the  Inventory  Balances 

The  reliability  of  the  inventory  balances  as  shown  by  the 
controlling  Raw  Material,  Work  in  Process,  and  Finished 
Stock  accounts  depends  to  a  large  extent  upon  the  accuracy 
of  the  clerical  work  done  and  the  means  of  proving  or  testing 
the  figures.     The  general  ledger  Raw  Material  account  con- 


GENERAL  LEDGER  CONTROL  307 

trols  the  raw  material  ledger  accounts;  therefore  the  total  of 
their  balances  should  be  in  agreement  with  the  balance  shown 
by  the  controlling  account  and  should  represent  the  amount  of 
material  and  supplies  on  hand  in  the  various  storerooms  of 
the  plant. 

In  like  n;ianner,  the  general  ledger  Work  in  Process  ac- 
count (also  termed  "Manufacturing"  account,  "Process"  ac- 
count, and  "Operating"  account)  controls  the  charges  to  jobs 
or  orders  in  the  course  of  manufacture.  Therefore  its  bal- 
ance should  equal  the  total  of  all  charges  entered  in  detail 
on  the  uncompleted  cost  sheets. 

The  general  ledger  Finished  Stock  account  controls  the 
finished  stock  ledger  accounts;  therefore  their  total  balances 
should  be  in  agreement  with  the  balance  of  the  general  ledger 
account  and  should  represent  the  actual  quantity  of  finished 
stock  on  hand. 

A  perfect  system  of  controlling  the  accuracy  of  the  mer- 
chandise inventory  may  be  installed,  yet  the  figures  may  not 
agree  with  the  actual  facts  as  shown  by  the  amount  of  the  mer- 
chandise in  the  storerooms  and  operating  departments.  There- 
fore it  is  necessary  to  test  the  accuracy  of  the  balances  of  the 
detailed  records,  by  verifying  them  with  the  actual  quantities 
of  merchandise  on  hand. 

Subdivisions  of  Controlling  Accounts 

Where  large  quantities  of  different  kinds  of  raw  material 
are  kept  in  the  same  or  separate  storerooms,  a  controlling 
account  may  be  kept  with  each  kind  of  raw  material  or  with 
each  storeroom.  For  example,  there  might  be  a  raw  material 
account  for  steel  parts,  another  for  paints  and  varnishes,  and 
another  for  miscellaneous  materials  and  supplies,  in  which 
cases  the  detailed  records  would  be  kept  in  separate  ledgers 
allotted  to  each  classification. 

The  Work  in  Process  account  might  be  expanded  into 


3o8  CONTROLLING  THE   COST   RECORDS 

separate  accounts  for  each  operating  department — as  in  a  gar- 
ment factory  where  the  manufacturing  cost  of  the  cutting, 
trimming,  sewing,  and  inspecting  departments  may  be  sepa- 
rately recorded.  This  subdivision  of  the  control  may  be  car- 
ried to  the  point  of  keeping  a  separate  account  for  each  con- 
tract. Where  this  is  done,  all  details  of  the  material,  labor, 
and  overhead  costs  are  posted  directly  to  a  separate  ledger 
Work  in  Process  account  headed  with  the  name  of  the  con- 
tract or  a  contract  number. 

The  finished  stock  may  be  controlled  by  means  of  several 
accounts  so  as  to  show  the  cost  of  the  various  kinds  of  prod- 
uct manufactured.  In  such  a  case  the  account  classification 
is  generally  determined  by  the  method  of  classifying  the  sales. 

Controlling  Factory  Transactions — ^Third  Method 

Where  the  main  or  general  office  is  far  removed  from  the 
factory,  or  when  the  large  amount  of  capital  tied  up  in  the 
inventories  makes  it  desirable  to  control  each  major  classi- 
fication of  the  stock  on  hand  separately,  the  foregoing  method 
of  control  proves  inconvenient  because  of  the  amount  of  de- 
tail to  be  entered  on  the  general  ledger.  This  interferes  to 
a  large  extent  with  keeping  the  postings  up  to  date  and  makes 
the  financial  records  cumbersome  and  bulky.  Therefore,  with 
a  view  to  simplifying  the  method  of  control,  the  inventory 
controlling  accounts  are  often  kept  in  the  factory  ledger,  which 
in  its  turn  is  controlled  by  a  single  account  kept  on  the  gen- 
eral ledger  in  the  main  or  general  office. 

Factory  Ledger  Controlling  Account  in  the  General  Lredger 

The  single  controlling  account  opened  on  the  general 
ledger  is  termed  **Factory  Ledger"  account  or  "Factory"  ac- 
count, for  the  reason  that  it  shows  on  one  side  the  total  fac- 
tory expenditures  and  on  the  other  the  cost  of  the  finished 
goods  for  the  period.     The  difference  between  the  two,  i.e., 


GENERAL  LEDGER  CONTROL 


309 


the  balance  of  the  account,  represents  the  value  of  the  mer- 
chandise inventories  on  hand. 

The  Factory  Ledger  controlling  account  is  charged  with : 

1.  Merchandise  on  hand  at  the  beginning  of  the  period, 

as  shown  by  the  inventory  record. 

2.  The  total  amount  of  material  purchased,  as  shown 

by  the  purchase  record  or  voucher  register. 

3.  The  total  amount  of  salaries  and  wages  paid  for 

productive  and  non-productive  labor  as  shown  by 
the  pay-roll  analysis. 

4.  The  total  amount  of  factory  indirect  expenses,   as 

shown  by  the  purchase  or  voucher  record,  fixed 
schedules,  and  other  analysis  records  of  factory 
expenses. 

The  Factory  Ledger  controlling  account  is  credited  with : 

1.  The  total  cost  of  shipments. 

2.  The  total  cost  of  work  done,  by  the  factory,  charge- 

able against  selling  or  administrative  expenses. 

Using  the  entries  and  figures  given  on  296-298,  and  con- 
structing a  factory  ledger  controlling  account  therefrom,  the 
result  would  be  as  follows : 

Factory  Ledger  Controlling  Account 

Jan.    I  M'dise  Inventory  $226,700     Jan.  31  Cost  of  Sales. . . .  $60,000 
31  M'dise  Purchased     59,000 

31  Prod.  Labor 18,000 

31  Non-Prod.    Labor      4,500 
31  Indirect    Labor. .       2,500 

Thus  the  above  account  replaces  the  Raw  Material,  Work 
in  Process,  and  Finished  Stock  accounts,  which  are  then  kept 
in  any  desired  detail  in  the  factory  ledger.  After  all  informa- 
tion is  posted  to  the  accounts,  a  trial  balance  prepared  from  the 
general  ledger  would  appear  as  follows : 


3IO  CONTROLLING  THE   COST   RECORDS 

The  Brown  Manufacturing  Company 

General  Ledger  Trial  Balance 

January  31,  1918 

1  Cash  $  39,700.00 

2  Accounts  Receivable   159,000.00 

3  Notes  Receivable 15,000.00 

5  Machinery  and  Fixtures 35,000.00 

6  Notes  Payable   $  15,000.00 

7  Accounts  Payable  64,000.00 

9     Capital  Stock  350,000.00 

10  Surplus    54,700.00 

11  Sales    85,000.00 

15  Selling  Expenses  5,800.00 

16  Administrative  Expenses 3,500.00 

18  Cost  of  Sales  Account 60,000.00 

22  Factory   Ledger   Account    2'5o,7oo.oo 

$568,700.00    $568,700.00 


A  balance  sheet  and  a  manufacturing  profit  and  loss 
statement  may  be  prepared  from  this  trial  balance  and  the 
supporting  ledger  accounts  without  waiting  to  see  whether  the 
detailed  accounts  are  in  agreement  with  the  balance  as  shown 
by  the  Factory  Ledger  controlling  account. 

Classification  Chart  of  General  Ledger  Accounts 

In  large  manufacturing  concerns  it  is  customary  to  pro- 
vide a  chart  or  a  classified  list  of  accounts  showing  the  exact 
name  of  each  and  the  transactions  to  be  recorded  therein. 
Where  the  classification  is  elaborate,  it  is  well  to  use  account 
numbers  or  symbols  so  as  to  facilitate  ready  reference  to 
them  and  thus  save  the  bookkeepers'  time.  Such  a  chart  should 
be  printed  upon  heavy  paper  or  cardboard  and  hung  in  view 
of  those  who  have  occasion  to  refer  to  it  frequently.  Where 
desks  are  equipped  with  glass  tops  and  the  chart  is  inserted 
under  the  glass,  reference  can  be  made  to  it  very  readily. 

The  requirements  of  each  concern  govern  the  number  of 
copies  of  the  chart  of  accounts  to  be  prepared  and  the  mem- 


GENERAL  LEDGER  CONTROL  311 

bers  of  the  staff  to  whom  they  are  to  be  given.  Ordinarily 
it  is  necessary  for  each  clerk  in  the  accounting  and  cost  de- 
partments to  have  his  own  copy,  while  an  additional  copy 
should  be  given  to  the  purchasing  agent  and  treasurer  or  the 
officer  who  is  in  charge  of  the  accounting  records.  Portions 
of  the  chart  of  accounts  may  be  given  to  the  plant  superinten- 
dent, production  manager,  factory  foreman,  stock  clerks,  and 
factory  clerks. 

The  chart  shown  in  Form  69  gives  a  classified  list  of 
accounts  of  a  large  manufacturing  concern. 

Arrangement  of  General  Ledger  Accounts 

The  order  in  which  accounts  appear  in  the  general  ledger 
depends  upon  their  number  and  the  kind  of  ledger  in  use — 
whether  a  bound  book  or  loose-leaf  in  form.  If  the  accounts 
are  not  numerous,  it  is  well  to  arrange  them  in  the  order  in 
which  they  appear  in  the  financial  statements  so  as  to  facilitate 
the  preparation  of  the  latter  at  the  end  of  each  cost  period.  A 
suggested  order  of  arrangement  for  the  various  classes  of 
accounts  is: 

1.  Asset  accounts 

2.  Liability  accounts 

3.  Capital  accounts 

4.  Income  accounts 

5.  Cost  of  sales  accounts 

6.  Selling  expense  accounts 

7.  Administrative  expense  accounts 

If  a  loose-leaf  ledger  is  kept,  the  accounts  may  be  classi- 
fied by  tab  indexes  so  as  to  show  each  of  the  above  classifica- 
tions under  a  separate  tab.  Where  an  elaborate  classification 
of  accounts  is  made,  they  are  often  arranged  in  loose-leaf 
ledgers  according  to  the  symbol  references. 

When  accounts  are  numerous,  those  of  a  like  nature  are 


312 


CONTROLLING   THE   COST   RECORDS 


ASSET,  LIABILITY,  AND  CAPITAL  ACCOUNTS 


Name  of  Accoxjnt 


No. 


Assets: 

Petty  Cash  Fund i 

First  National  Bank 2 

City  Trust  Company 3 

Salesmen 's  Cash  Funds 6 

Branch  Office  Cash  Funds 8 

Accounts  Receivable  A-K 10 

Accounts  Receivable  L-Z 11 

Suspended  Accts.  Receivable  14 

Personal  Accts.  Receivable...  15 

Notes  Receivable 18 

Factory  Ledger  Account 20 

Real  Estate — Land 25 

Real  Estate — Buildings 26 

Factory   Machinery   and 

Equipment 27 

Factory  Small  Tools 28 

Office  Ekiuipment 29 

Deferred  Charges 35 


Name  of  Account 


No. 


Liabilities: 

Notes  Payable 50 

Accounts  Payable 51 

Personal  Loans 52 

Accrued  Salaries  and  Wages..  53 

Accrued  Interest 54 

Accrued  Taxes 55 

Mortgage 60 

Reserves: 

Depreciation — Buildings 65 

Depreciation — Machinery 

and  Equipment 66 

Depreciation — Small  Tools 67 

Depreciation — Office    Equip- 
ment   68 

Doubtful  Accounts 69 

Capital  Stock: 

Preferred  Issue 75 

Common  Issue 76 

Surplus 80 


SALES,  COST  OF  SALES,  AND  INCOME  ACCOUNT 


Name  of  Account 


No. 


Sales: 

Gowns 90 

Dresses 91 

Suits 92 

Cloaks 93 

Waists 94 

Deductions  from  Sales: 

Allowances — Gowns 100 

Allowances — Dresses loi 

Allowances — Suits 102 

Allowances — Cloaks 103 

Allowances — Waists 104 


Name  of  Account 


No. 


Cost  of  Sales: 

Gowns no 

Dresses in 

Suits 112 

Cloaks 113 

Waists 114 

Miscellaneous  Income: 

Interest  Earned 120 

Discount  Earned 121 

Miscellaneous  Items 122 

Deductions  from  Income: 

Interest  Allowed 130 

Discount  Allowed 131 

Miscellaneous  Items 132 


Form  69.    Classification  Chart 


GENERAL  LEDGER  CONTROL 


313 


SHIPPING  AND  SELLING  EXPENSES 


Shipping  Expenses: 

Salaries — Supervision 1 40 

Wages 141 

Rent 142 

Packing  Supplies 143 

Repairs 144 

Depreciation 145 

Liability  Insurance 146 

Light,  Heat  and  Power 147 

Teaming  and  Cartage 148 

Miscellaneous  Expenses 1 49 


Name  of  Account 


No. 


Name  of  Account  No. 

Selling  Expenses: 

Salesmen's  Salaries 160 

Salesmen 's  Commissions 161 

Salesmen's  Expenses 162 

Advertising 163 

Rent 164 

Printing  and  Stationery 165 

Postage 166 

Office  Supplies 167 

Repairs 168 

Depreciation 169 

Light  and  Heat 170 

Samples 171 

Telephone  and  Telegraph 172 

Conventions 173 

Miscellaneous  Expenses 174 


ADMINISTRATIVE  EXPENSES 


Name  of  Account 


No. 


Executive  Salaries 180 

Office  Clerks'  Salaries 181 

Executive  Expenses 182 

Rent 183 

Printing  and  Stationery 184 

Postage 185 

Office  Supplies 186 

Repairs 187 

Depreciation 188 

Light  and  Heat 189 

Telephone  and  Telegraph 190 

Charity  and  Donations 191 

Mercantile  Agencies 192 

Association  Dues 193 

Collection  Expenses 194 

Legal  Expenses 195 

Auditing  Expenses 196 

Miscellaneous  Expenses 197 


of  General  Ledger  Accounts 


314  CONTROLLING  THE  COST   RECORDS 

sometimes  grouped  and  supported  by  subsidiary  ledgers  or 
analysis  records.  For  example,  one  sales  account  may  show 
total  transactions  and  be  supported  by  an  analytical  sales 
record  of  the  product  classifications.  The  total  net  sales  of 
each  class  could  be  ascertained  by  reference  to  this  detailed  sub- 
sidiary record.  In  like  manner,  instead  of  several  cost  of 
sales  accounts,  one  cost  of  sales  account  may  be  supported  by 
an  analysis  record  showing  the  cost  of  sales  for  each  classi- 
fication in  detail.  Selling  and  administrative  expenses  may 
be  treated  in  the  same  way.  However,  in  the  majority  of 
cases,  it  is  simpler  to  keep  detailed  general  ledger  accounts 
with  each  item  rather  than  separate  subsidiary  analysis  records. 
The  operation  of  the  ledger  accounts  shown  in  the  chart 
on  pages  312,  313  is  not  described  in  this  volume  as  the  subject 
of  general  accounting  is  beyond  the  present  scope.  The  princi- 
ples of  double-entry  bookkeeping  and  general  accounting 
should  be  thoroughly  understood  by  anyone  who  attempts  to 
operate  a  cost  accounting  system  and  provide  for  the  method 
of  interlocking  the  cost  accounts  with  the  financial  accounts. 


CHAPTER  XX 

FACTORY  LEDGER  CONTROLLING  ACCOUNTS 

Methods  of  Keeping  the  Factory  Ledger 

In  developing  the  method  of  controlHng  factory  costs,  it 
has  been  noted  that  under  some  conditions  it  is  more  practi- 
cable to  keep  a  separate  factory  ledger — variously  termed 
"Manufacturing  Ledger,"  "Cost  Ledger,"  "Cost  Department 
Ledger,"  or  "Factory  Ledger."  This  record,  which  controls 
the  detailed  cost  compilations  of  material,  labor,  and  overhead, 
is  usually  controlled  in  its  turn,  as  already  stated,  by  a  single 
general  ledger  account  which  forms  part  of  the  financial  ac- 
counting system. 

There  are  two  methods  of  keeping  the  subsidiary  factory 
ledger.  Under  the  first  method  it  is  not  self -balancing;  under 
the  second  method  it  is  self-balancing.  That  is,  in  the  former 
instance,  the  balance  of  the  Factory  Ledger  controlling  ac- 
count in  the  general  ledger  must  be  obtained  before  it  is 
known  whether  or  not  the  factory  ledger  accounts  are  cor- 
rect, while  in  the  latter  instance,  the  mathematical  accuracy 
of  the  entries  can  be  proved  without  referring  to  the  general 
ledger  controlling  account.  When  the  second  or  self-balanc- 
ing method  is  used,  a  "General  Ledger"  account  is  kept  in  the 
factory  ledger.  Under  both  methods  the  factory  ledger  ac- 
counts are  usually  divided  into  the  classifications  of : 

1.  Raw  material  accounts 

2.  Work  in  process  accounts 

3.  Part-finished  stock  accounts 

4.  Finished  stock  accounts 

5.  Labor  accounts 

6.  Factory  indirect  expense  accounts 

315 


3i6  CONTROLLING  THE  COST  RECORDS 

Factory  Journal 

To  facilitate  postings  to  the  factory  ledger  accounts,  a 
factory  journal  or  journal  vouchers  may  be  used  in  the  man- 
ner described  in  Chapter  XVIII.  If  the  journal  is  employed 
for  adjusting  entries  only,  a  regular  two-column  book  will 
serve  this  simple  purpose.  It  should  be  remembered,  however, 
that  the  use  of  a  factory  journal  is  often  a  duplication  of 
clerical  work,  as  postings  may  be  made  directly  to  the  ledger 
accounts  from  the  detailed  cost  summaries. 

Raw  Material  Accounts 

One  or  several  raw  material  accounts  may  control  the 
items  of  direct  material  and  supplies  classified  on  the  stores 
ledger  either  by  kinds  or  by  location.  The  number  of  ac- 
counts and  storerooms  operated  will  obviously  depend  upon 
the  requirements  in  each  case.  Whatever  their  number,  they 
should  provide  for  the  proper  test  of  the  detailed  items  of  raw 
material  composing  the  merchandise  inventory. 

In  the  problem  given  in  the  preceding  chapter,  the  in- 
ventory of  raw  material  on  hand  at  January  31,  19 18,  is 
$96,200.  If  only  one  controlling  account  were  kept,  and  it 
was  found  that  the  total  of  the  stores  ledger  balances  did  not 
agree  with  the  balance  of  the  raw  material  controlling  ac- 
count, the  detail  postings  would  have  to  be  verified  before  the 
discrepancy  could  be  located.  But  if  the  stores  items  were 
divided  into  several  classifications  and  separate  accounts  were 
kept  for  each,  errors  in  postings  would  more  readily  be  lo- 
cated. In  determining  the  classifications  of  raw  material  the 
question  to  be  considered  is  the  need  of  checking  the  consump- 
tion and  valuation  of  different  kinds  of  stores.  Raw  material 
may  be  stored  in  several  storerooms,  and  in  order  to  fix  re- 
sponsibility upon  the  stores-keeper  in  charge,  it  may  be  nec- 
essary to  control  each  storeroom  separately. 

Under  certain  conditions  the  value  of  the  raw  material 


FACTORY  LEDGER  CONTROL  317 

used  in  the  manufacture  of  different  products  may  vary  widely. 
It  is  important  to  charge  any  discrepancies  in  the  raw  ma- 
terial stores  to  the  correct  product  classification,  otherwise 
a  product  with  a  low  material  cost  would  be  charged  with 
more  than  its  proper  proportion.  This  is  particularly  essen- 
tial in  cases  where  the  compensation  of  certain  members  of 
the  organization  depends  to  some  extent  upon  the  profits  re- 
sulting from  the  sale  of  certain  products. 

Postings  to  Raw  Material  Accounts 

The  method  of  posting  the  transactions  to  several  raw 
material  accounts  is  the  same  as  the  method  of  posting  to  one 
account,  excepting  that  additional  entries  may  be  required  to 
record  any  stock  transfers  between  storerooms.  The  debits 
and  credits  and  the  source  of  the  figures  in  each  case  are 
enumerated  below. 

The  raw  materials  accounts  are  debited  with : 

1.  The  amount  of  inventory  on  hand  at  the  beginning 

of  the  period. 

2.  The   total   amount   of   raw   material   purchased,   as 

shown  by  the  purchase  records  or  voucher  regis- 
ter, together  with  the  supporting  invoices  or  ac- 
counts payable  vouchers  and  reports  of  material 
received.  Merchandise  returned  to  the  creditors 
should  be  treated  as  deductions  from  the  pur- 
chases. 

3.  The  total  amount  of  stock  transfers  during  period. 

The  raw  materials  accounts  are  credited  with : 

1.  The  total  amount  of  material  issued  from  stock  as 

shown  by  the  summary  of  material  requisitions. 
Material  which  is  returned  to  stores  should  be 
treated  as  deductions  from  amount  requisitioned. 

2.  The  total  amount  of  stock  transfers  during  the  period. 


3i8  CONTROLLING  THE  COST   RECORDS 

Any  adjusting  entries  to  bring  the  controlling  accounts 
in  agreement  with  the  subsidiary  stores  ledger  or  the  raw  ma- 
terial inventory  should  be  made  in  the  journal  and  posted  to 
the  accounts.  Obsolete  raw  material  and  supplies — which,  as 
already  stated,  are  usually  kept  in  a  separate  part  of  the  store- 
room— should  be  controlled  separately. 

Work  in  Process  Accounts 

The  work  in  process  account,  or  accounts,  control  the 
cost  sheets  of  either  the  jobs,  orders,  or  articles  in  the  course 
of  manufacture,  or  the  various  processes  through  which  the 
product  passes.  Work  in  process  accounts  may  be  kept  in 
three  different  ways,  as  follows : 

1.  One  account  may  control  all  the  work  in  process. 

2.  Separate  accounts  may  control  each  operating  de- 

partment. 

3.  Separate  accounts  may  control  each  job  or  factory 

order  issued,  or  each  process  or  each  machine. 

Where  both  special  and  standard  products  are  manu- 
factured, it  is  well  to  keep  the  work  in  process  accounts  sepa- 
rately in  each  case  if  it  is  practicable  to  do  so.  If  the  operat- 
ing departments  of  the  plant  can  be  so  organized  that  the 
special  product  is  handled  by  special  employees,  this  distinctive 
control  of  the  two  classes  of  product  may  be  easily  effected. 

The  advantages  of  keeping  several  work  in  process  ac- 
counts in  place  of  one  controlling  account  are  three  in  number : 

1.  Discrepancies  are  more  easily  noted. 

2.  A  test  of  the  inventory  value  of  the  work  in  process 

is  more  easily  made  and  discrepancies  can  be  ad- 
justed more  readily. 

3.  If  it  is  necessary  to  adjust  discrepancies  in  the  cost 

of  work  in  process  due  to  unlocated  differences, 
several  accounts  provide  more  satisfactory  means 


FACTORY  LEDGER  CONTROL 


319 


of  making  the  necessary  corrections.  Adjust- 
ments can  then  be  made  upon  the  one  account 
without  affecting  the  other  accounts. 

Postings  to  Work  in  Process  Accounts 

The  method  of  keeping  the  work  in  process  accounts  is 
practically  the  same  for  one  or  several  accounts,  and  in  all 
cases  includes  the  entries  below. 

The  work  in  process  accounts  are  debited  with : 

1.  The  cost  value  of  the  inventory  of  work  in  process 

on  hand  at  the  beginning  of  the  period. 

2.  The  direct  material  received  from  stores  as  shown 

by  the  summary  of  material  requisitions  after  de- 
ducting material  returned  to  stores. 

3.  The  direct  labor  for  the  period  as  shown  by  the  pay- 

roll analysis. 

4.  The  total  amount  of  departmental  factory  overhead 

as  shown  by  the  overhead  distribution  records. 

The  work  in  process  accounts  are  credited  with: 

1.  The  material,  labor,  and  overhead  costs  of  the  pro- 

duction transferred  to  finished  stock,  part-finished 
stock,  or  raw  materials  stock  accounts. 

2.  The  total  material,  labor,  and  overhead  costs  of  any 

machinery,  tools,  or  other  equipment  which  has 
been  manufactured  for  the  use  of  the  plant  and  is 
to  be  capitalized  among  the  plant  assets. 

3.  The  total  material,  labor,  and  overhead  costs  of  main- 

tenance and  repairs  which  have  been  absorbed  in 
the  factory  overhead. 

4.  The  total  material,  labor,  and  overhead  costs  of  the 

maintenance  and  repairs,  which  are  absorbed  in 
the  selling  and  administrative  expense  accounts. 


320  CONTROLLING  THE  COST   RECORDS 

Adjusting  entries  to  cover  discrepancies  in  the  cost  of 
work  in  process  would  also  be  debited  or  credited  to  the  work 
in  process  accounts. 

Form  of  Work  in  Process  Account 

Of  the  several  forms  of  work  in  process  accounts  the  one 
most  commonly  employed  is  the  ledger  account  form,  in  which 
charges  and  credits  for  material,  labor,  and  overhead  are 
shown  in  one  money  column  as  illustrated  in  Form  70. 

If  it  is  required  to  check  the  material,  labor,  and  over- 
head charges  and  credits,  this  may  be  done  in  two  ways : 

1.  The  elements  of  cost  may  be  recorded  in  separate  ac- 
counts, as  in  Form  70,  and  headed  respectively : 

(a)  Work  in  Process  Material  Cost 

(b)  Work  in  Process  Labor  Cost 

(c)  Work  in  Process  Overhead  Cost 

2.  The  information  may  all  be  recorded  upon  one  ac- 
count, as  shown  in  Form  71,  with  separate  columns  for  the 
charges  and  credits  for  material,  labor,  and  overhead.  Under 
this  method  the  number  of  accounts  is  greatly  reduced. 

Part-Finished  Stock  Accounts 

The  part-finished  stock  account,  or  accounts,  also  termed 
"Finished  Parts  Account,"  "Manufactured  Parts  Account," 
"Completed  Parts  Account,"  control  the  part-finished  stores 
ledger.  One  account  may  be  kept  for  all  part-finished  stock; 
or  the  different  classes  of  part-finished  stock  may  each  have 
its  own  account;  or  the  main  part-finished  storeroom  and  the 
sub-storerooms  may  have  separate  accounts,  depending  upon 
the  requirements  of  the  plant. 

As  in  the  case  of  work  in  process,  the  keeping  of  several 
accounts  instead  of  one  brings  to  notice  any  large  discrepan- 
cies in  costs  more  readily,  as  the  balances  on  detailed  accounts 
are  smaller  and  large  fluctuations  can  be  more  easily  detected. 


FACTORY  LEDGER  CONTROL 


321 


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322 


CONTROLLING  THE  COST   RECORDS 


If  there  is  only  one  controlling  account,  its  balance  may  be  so 
large  that  a  discrepancy  of  a  few  thousand  dollars  may  be 
passed  when  the  balances  are  compared  at  the  end  of  each 
month.  When  there  are  several  accounts,  discrepancies  are 
more  accurately  adjusted,  as  the  differences  can  then  be 
charged  to  the  product  to  which  they  are  applicable  instead  of 
being  arbitrarily  distributed  over  the  entire  production.  This 
is  an  important  point  when  individual  compensation  depends 
upon  the  profits  from  special  classes  of  product. 

The  obsolete  finished  parts  carried  in  stock  should  be 
controlled  separately,  as  it  is  important  to  keep  a  check  on  these 
items  so  that  the  capital  invested  in  slow-moving  stock  may 
be  reduced  to  the  minimum.  Finally,  the  account  classifica- 
tion of  part-finished  stock  facilitates  the  preparation  of  factory 
orders  for  the  production  of  finished  parts. 

Postings  to  Part-Finished  Stock  Accounts 

Part-finished  stock  accounts  are  kept  practically  in  the 
same  manner  as  those  for  raw  material,  and  the  procedure  is 
the  same  for  one  or  several  accounts. 

The  part-finished  stock  accounts  are  debited  with : 

1.  The  total  amount  of  the  finished  parts  inventory  on 

hand  at  the  beginning  of  the  period. 

2.  The  total  cost  of  the  finished  parts  completed  and 

transferred  to  the  stock-rooms  as  shown  by  the 
production  summaries. 

3.  The  total  cost  of  the  transfers  made  from  the  various 

storerooms. 

4.  The  total  cost  of  such  items  as  may  be  returned  to 

the  part-finished  stock  storerooms  from  the  oper- 
ating departments  or  from  customers,  as  shown 
by  detailed  summaries  covering  these  returns. 

The  part-finished  stock  accounts  are  credited  with: 


FACTORY  LEDGER  CONTROL  323 

1.  The  total  cost  of  the  part-finished  stock  which  is 

transferred  to  the  operating  departments  for  use 
in  the  manufacture  of  the  completed  articles,  as 
shown  upon  a  summary  of  requisitions  or  a  sum- 
mary of  departmental  material  used. 

2.  The  total  cost  of  the  part-finished  stock  transferred 

to  other  stock-rooms,  as  shown  by  a  summary 
of  stock  transfers. 

3.  The  total  cost  of  part-finished  stock  shipped  to  cus- 

tomers, as  shown  by  a  summary  of  cost  of  sales. 

The  part-finished  stock  accounts  are  also  debited  or  cred- 
ited with  the  amount  of  any  adjustments  required  when  an 
inventory  test  shows  that  the  controlling  accounts  are  not  in 
agreement  with  the  detailed  part-finished  stores  ledgers. 

Finished  Stock  Accounts 

The  finished  stock  accounts  control  the  finished  stock 
ledgers,  and,  like  the  stock  accounts  already  described,  they 
may  be  kept  in  several  ways : 

1.  One  account  for  all  finished  stock. 

2.  Distinctive  accounts  for  the  different  classes  of  fin- 

ished product. 

3.  Distinctive  accounts  for  the  various  finished  stock 

storerooms  located  in  different  parts  of  the  plant. 

The  account  classification  of  finished  stock  is  a  valuable 
aid  to  the  issuance  of  factory  production  orders  and  to  the 
sales  department,  as  the  amount  of  stock  of  the  different 
classes  of  product  on  hand  is  readily  determined  if  several 
controlling  accounts  are  kept  in  place  of  one.  Discrepancies 
are  more  readily  located  and  any  necessary  adjustments  may 
be  charged  to  the  proper  accounts.  The  method  of  entering 
the  information  to  the  ledger  accounts  is  exactly  the  same  for 
one  or  several  finished  stock  accounts. 


324  CONTROLLING  THE   COST   RECORDS 

Posting  to  Finished  Stock  Accounts 

The  finished  stock  account,  or  accounts,  are  debited  with : 

1.  The  total  amount  of  the  inventory  of  finished  stock 

on  hand  at  the  beginning  of  the  period. 

2.  The  total  cost  of  the  finished  articles  as  shown  by  the 

production  summary. 

3.  The  total  cost  of  the  finished  stock  returned  by  cus- 

tomers as  shown  by  the  cost  of  returns  summary. 

4.  The  total  cost  of  transfers  made  to  a  particular  store- 

room from  other  storerooms  as  shown  by  the  sum- 
mary of  transfers. 

The  finished  stock  account,  or  accounts,  are  credited  with  : 

1.  The  total  cost  of  merchandise  shipped,  as  shown  by 

the  cost  of  sales  summary. 

2.  The  total  cost  of  merchandise  transferred  to  operat- 

ing departments  of  the  plant  to  be  used  in  the  pro- 
duction of  other  articles. 

3.  The  total  cost  of  transfers  to  other  stock-rooms  as 

shown  by  the  summary  of  stock  transfers. 

Entries  for  adjusting  discrepancies  are  also  debited  or 
credited  to  the  various  accounts,  as  the  case  may  require. 

Productive  Labor  Accounts 

Under  some  conditions,  the  productive  labor  is  charged 
directly  to  the  work  in  process  account  of  each  department, 
as  incurred.  This  may  be  a  correct  method  under  certain  cir- 
cumstances, but  its  disadvantage  is  that  the  total  productive 
labor  for  a  fiscal  period  cannot  readily  be  ascertained.  To 
meet  this  requirement  a  productive  labor  account  may  be 
opened  and  charged  with  the  direct  wages  week  by  week,  or 
as  required,  and  credited  with  the  charges  to  departments  at 
the  end  of  the  period ;  or  a  separate  productive  labor  account 
may  be  kept  for  each  department  and  closed  out  to  the  work 


FACTORY  LEDGER  CONTROL  325 

in  process  account  for  that  department  at  the  end  of  the  pe- 
riod. The  needs  of  each  case  determine  in  what  detail  the 
labor  element  of  cost  should  be  recorded. 

Factory  Indirect  Expense  Accounts 

Each  item  of  indirect  expense  is  applicable  to  definite  op- 
erating departments  and  provision  must  be  made  for  showing 
the  charge  in  each  case.  The  simplest  method  is  to  open  an 
account  for  each  item  of  overhead  for  each  department,  and 
this  is  the  method  used  in  large  concerns.  The  obvious  draw- 
back to  this  method  is  the  large  number  of  expense  accounts 
which  it  entails.  The  number  can  be  greatly  reduced  by  re- 
cording the  information  for  all  departments  upon  a  ledger  ac- 
count for  each  item,  as  in  Form  'J2.  The  form  of  this  ac- 
count may  be  arranged  so  that  the  name  of  the  department 
appears  in  the  heading  and  the  columns  show  the  various 
items  of  factory  overhead  applicable  to  that  department,  as 
illustrated  in  Form  jt^. 

If  it  is  necessary  to  post  any  credits  to  the  above  accounts, 
they  should  be  entered  in  different  colored  ink  so  as  to  show 
that  the  items  are  to  be  deducted  from  the  rest  of  the  transac- 
tions, or  a  separate  account  for  showing  credits  should  be  used. 

After  the  total  department  overhead  is  ascertained,  pro- 
vision must  be  made  for  transferring  this  total  to  the  depart- 
ment work  in  process  accounts,  in  which  the  overhead  must  be 
absorbed.  To  make  this  transfer  in  the  simplest  way  possible, 
each  overhead  account  may  be  credited  at  the  end  of  the  cost 
period  and  the  total  in  each  case  charged  to  the  work  in  proc- 
ess account  of  that  department.  This  procedure,  however, 
would  necessitate  numerous  postings.  For  example,  there 
might  be  from  ten  to  twelve  entries  to  the  credit  of  each  item 
of  expense,  and  assuming  that  there  are  a  dozen  or  more  de- 
partments, the  large  amount  of  detailed  posting  can  be  readily 
seen,  as  the  ten  or  twelve  overhead  items  would  be  applicable 


326 


CONTROLLING  THE   COST   RECORDS 


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FACTORY  LEDGER  CONTROL 


327 


to  most  of  the  operating  departments.  A  short-cut  may  be 
provided  by  means  of  a  separate  account  styled  "Distributed 
Overhead  Account." 

Distributed   Overhead  Accounts 

The  distributed  overhead  account  is  used : 

1.  For  the  purpose  of  showing  the  total  amount  of  over- 

head applicable  to  each  department. 

2.  For  the  purpose  of  saving  time  in  posting  when  it 

is  necessary  to  transfer  the  total  amount  of  the 
factory  overhead  items  to  the  various  work  in 
process  accounts. 

A  distributed  overhead  account  should  be  kept  for  each 
department  of  the  plant,  including  productive,  non-productive, 
and  miscellaneous  departments,  and  for  general  operating  ex- 
penses. When  the  transfers  of  the  overhead  items  are  made 
to  the  work  in  process  accounts,  the  total  amount  of  depart- 
mental overhead  is  debited  to  the  departmental  work-in-process 
account  and  the  total  credit  is  posted  to  the  distributed  over- 
head account  for  that  department.  This  eliminates  the  neces- 
sity of  posting  the  credits  in  detail  to  each  of  the  detailed  ex- 
pense accounts. 

This  last  method  is  also  used  in  transferring  the  total 
amount  of  general  operating  expenses.  The  distributed  over- 
head account  for  the  general  operating  expenses  is  credited, 
and  corresponding  charges  are  made  to  the  various  non-produc- 
tive department  accounts ;  a  trial  balance  may  then  be  prepared 
for  the  factory  overhead  accounts.  This  provides  a  method 
of  balancing  the  factory  overhead  expense  items  separately 
from  the  other  factory  accounts.  The  raw  material,  work  in 
process,  part-finished  stock,  and  finished  stock  accounts  would 
then  show  the  condition  of  the  items  of  the  merchandise  in- 
ventory. 


328  CONTROLLING  THE  COST   RECORDS 

General  Ledger  Account 

A  General  Ledger  account  is  opened  on  the  factory  ledger 
when  it  is  desired  to  make  the  factory  ledger  self -balancing. 
This  account  is  the  reverse  of  the  Factory  Ledger  account  on 
the  general  ledger. 

The  General  Ledger  account  is  credited  with : 

1.  The  total  amount  of  merchandise  inventory  as  the 

charges  are  made  to  the  various  raw  material, 
work  in  process,  part-finished  stock,  and  finished 
stock  accounts  at  the  beginning  of  the  period. 

2.  The  total  amount  of  merchandise  and  supplies  pur- 

chased during  the  cost  period,  as  shown  by  the 
purchase  record  or  voucher  register — the  raw  ma- 
terial accounts  being  debited. 

3.  The  total  amount  of  productive  and  non-productive 

labor  for  the  period,  as  shown  by  the  pay-roll 
analysis — the  productive  labor,  non-productive 
labor  accounts,  or  work  in  process  accounts  being 
debited. 

4.  The  total  amount  of  factory  overhead  expenses  for 

the  period,  as  shown  by  the  purchase  record  or 
voucher  register  and  the  fixed  schedules  or  mis- 
cellaneous analysis  records — the  various  detailed 
factory  overhead  accounts  being  debited. 

5.  The  total  cost  of  the  merchandise  returned  during  the 

period,  as  shown  by  the  summary  of  cost  returns, 
the  offsetting  entries  being  the  debits  to  the  vari- 
ous finished  stock  or  part-finished  stock  accounts. 

The  General  Ledger  account  is  debited  with: 

I.  The  total  cost  of  sales,  as  shown  by  the  summary  of 
cost  of  sales — at  the  time  the  finished  stock  or  part- 
finished  stock  accounts  are  credited. 


FACTORY  LEDGER  CONTROL  329 

2.  The  total  cost  of  machinery,  tools,  or  miscellaneous 

equipment  as  shown  by  the  production  summary — 
at  the  time  the  various  work  in  process  accounts 
are  credited. 

3.  The  total  cost  of  repairs  and  the  total  cost  of  miscel- 

laneous supplies  transferred  to  the  selling  or  ad- 
ministrative departments  of  the  business — at  the 
time  the  various  work  in  process  accounts  and  raw 
material  accounts  are  credited.  This  information 
would  be  shown  upon  the  production  summaries 
and  material  requisition  summaries. 

The  balance  of  the  General  Ledger  account  is  always  a 
credit,  and  is  in  agreement  with  the  total  amount  of  the  debit 
balances  shown  by  the  other  factory  ledger  accounts,  and  also 
with  the  debit  balance  of  the  Factory  Ledger  account  upon  the 
general  ledger. 

Any  adjustments  in  inventory  compilations  which  affect 
the  factory  ledger  accounts  must  necessarily  be  reflected  by 
means  of  an  entry  in  the  General  Ledger  account. 

Summary  of  Factory  Ledger  Controlling  Accounts 

Form  74  summarizes  the  discussion  of  the  factory  ledger 
accounts. 

Classification  Chart  of  Factory  Ledger  Accounts 

For  the  same  reason  that  it  is  advantageous  to  draw  up  a 
classification  sheet  of  the  general  ledger  accounts  of  a  large 
manufacturing  plant,  the  factory  ledger  accounts  may  also  be 
illustrated  by  means  of  a  chart  (Form  75).  In  preparing 
such  a  chart,  the  accounts  should  be  given  symbol  numbers. 
It  may  be  noted  that  factory  ledger  controlling  accounts  vary 
in  number  from  the  three  simple  accounts  previously  described 
to  several  hundred. 


330 


CONTROLLING   THE   COST   RECORDS 


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FACTORY  LEDGER  CONTROL  331 

Copies  of  the  chart  of  accounts  should  be  prepared, 
preferably  upon  heavy  cardboard  so  as  to  permit  of  ready 
reference  by  the  clerks  in  the  accounting  and  cost  accounting 
departments.  Copies  of  suitable  portions  of  the  chart  should 
also  be  given  to  the  factory  superintendent,  foremen,  factory 
clerks,  production  manager,  order  department  clerks,  and 
any  employees  in  the  organization  who  may  require  informa- 
tion for  charging  or  crediting  the  detailed  items  to  the  proper 
accounts. 

Form  of  Factory  Ledger 

A  factory  ledger  may  be  a  bound  book  or  a  loose-leaf 
book.  In  most  instances  it  is  more  practicable  to  use  a  loose- 
leaf  book  for  the  reason  that  sheets  with  ruling  to  suit  dif- 
ferent accounts  may  then  be  inserted  in  the  same  binder,  thus 
saving  the  added  expense  of  printing  different  kinds  of  rulings 
in  the  bound  book. 

Simple  ledger  rulings  are  usually  practicable  for  the  raw 
material,  part-finished  stock,  and  also  the  overhead  accounts, 
although  the  items  of  overhead  are  often  recorded  upon  a  spe- 
cial columnar  sheet.  The  information  as  to  the  work  in  process 
is,  as  a  rule,  recorded  upon  a  sheet  ruled  to  suit  particular  re- 
quirements. 

Arrangement  of  Factory  Ledger  Accounts 

The  arrangement  of  the  accounts  in  the  ledger  should 
receive  attention.  While  they  are  often  arranged  according 
to  their  symbol  numbers,  as  their  classification  is  more  or 
less  standardized,  they  may  be  grouped  in  sections  in  the  fol- 
lowing order : 

1.  Raw  material  accounts 

2.  Work  in  process  acounts 

3.  Part-finished  stock  accounts 


.^32 


CONTROLLING  THE  COST  RECORDS 


RAW  MATERIAL  ACCOUNTS 

FINISHED  PARTS  STOCK 
ACCOUNTS 

Name  of  Account          No. 

Lvmiber 300 

Raw  Material — Paints  and  Var- 
nish   301 

Raw  Material — Steel  Parts 302 

Raw  Material — Other  Items 303 

General  Supplies 304 

Name  of  Account           No. 

Finished  Sides 330 

Finished  Legs 331 

Finished  Pulls 332 

Other  Finished  Parts 333 

WORK  IN  PROCESS 
ACCOUNTS 

FINISHED  STOCK  ACCOUNTS 

Name  of  Account          No. 

A*  Cutting  Department 310 

B     Machine        Department — 

Special  Work 311 

C    Machine        Department — 

Standard  Work 312 

D    Assembling    Department — 

Special  Work 313 

E    Assembling       Department 

Standard  Work 314 

F     Finishing  Room 315 

G    Trimming  Department 316 

H    Inspecting  Department 317 

J     Packing  Department 318 

♦Letters     A- J    represent     productive 
operating  departments  of  the  plant. 

Name  of  Account           No. 

Desks 340 

Chairs 341 

Rockers 342 

Settees 343 

Cabinets — Standard 344 

Cabinets — Special 345 

Form  75.    Classification  Chart 


4.  Finished  stock  accounts 

5.  Productive  labor  accounts 

6.  Distributed  overhead  accounts 

7.  Detailed  factory  overhead  accounts 

The  sections  should  be  distinguished  by  means  of  tab  in- 
dexes marked  according  to  the  classifications.  Where  de- 
tailed overhead  accounts  are  kept  for  each  department,  it  may 
be  well  to  furnish  additional  tab  indexes  within  this  section 
marked  with  the  departments  of  the  plant  so  that  the  overhead 
accounts  of  one  department  may  be  readily  distinguished  from 
those  of  another. 

In  large  plants  the  factory  ledger  is  divided  into  two  rec- 


FACTORY  LEDGER  CONTROL 


333 

! 


FACTORY  INDIRECT  EXPENSES 


Name  of  Account 


Supervision 

Clerks'  Salaries 

Non-Productive  Labor..., 

Repairs 

Depreciation 

Insurance — Fire 

Insurance — Liability 

Rent 

Taxes 

Supplies 

Experimental  Work 

Defective  Work 

Light,  Heat,  and  Power 

Sundry  Expenses 

General  Operating 


360 
361 
362 
363 
364 
365 
366 
367 
368 

369 
370 
371 

372 
373 
374 


380 
381 
382 
383 
384 
385 
386 

387 
388 

389 
390 
391 
392 
393 
394 


400 
401 
402 

403 
404 

405 
406 
407 
408 
409 
410 
411 
412 

413 
414 


420 
421 
422 
423 
424 
425 
426 

427 
428 
429 
430 
431 
432 
433 
434 


440 
441 
442 
443 
444 
445 
446 
447 
448 

449 
450 
451 

452 
453 
454 


460 
461 
462 

463 
464 

465 
466 
467 
468 
469 
470 

471 
472 

473 
474 


480 
I 
2 

483 
484 

485 
486 

487 
488 

489 
490 
491 
492 
493 
494 


500 
501 
502 
503 
504 
505 
506 

507 
508 

509 
510 

511 
512 
513 
514 


520 
521 
522 
523 

524 
525 
526 

527 
528 
529 
530 
531 
532 
533 
534 


540 


542 
543 
544 
545 
546 
547 
548 
549 


553 

554 


?l 


560 
561 


563 
564 


566 
567 


569 


572 
573 


K  d 
o 


580 
581 
582 
583 
584 
585 
586 

587 
588 
589 


592 

593 


of  Factory  Ledger  Accounts 

ords,  one  containing  the  raw  material,  work  in  process,  part- 
finished  stock,  and  finished  stock  accounts,  and  the  other  con- 
taining the  overhead  expense  accounts.  When  the  method  of 
proving  the  factory  overhead  separately  from  the  other  fac- 
tory ledger  accounts  is  used,  as  previously  explained,  the  above 
division  can  readily  be  made. 


Verification  of  Controlling  Accounts 

Most  of  the  factory  ledger  accounts  are  controlling  ac- 
counts, and,  when  a  trial  balance  of  the  factory  ledger  is  pre- 
pared at  the  end  of  the  period,  provision  must  be  made  for 
verifying  the  balances  of  the  controlling  accounts.     The  veri- 


334  CONTROLLING   THE   COST   RECORDS 

fication  of  the  detailed  balances  of  the  controlling  accounts 
may  be  made  in  several  different  ways. 

If  money  values  are  entered  upon  the  stock  records,  a 
trial  balance  may  be  prepared  from  the  raw  material,  finished 
parts,  and  finished  stock  stores  ledgers,  and  these  may  then  be 
proved  with  their  respective  controlling  accounts  in  the  factory 
ledger.  If  money  values  are  not  entered  upon  the  stock  rec- 
ords, verification  of  the  controlling  accounts  can  be  made  only 
after  cost  values  are  inserted  at  the  end  of  each  period  and 
the  calculation  is  made  for  the  entire  quantity  on  hand.  There- 
fore, when  only  quantities  appear  upon  stock  records,  the  con- 
trolling accounts  cannot  be  so  readily  or  so  frequently  tested. 
All  controlling  accounts  should  be  verified  at  least  once  during 
the  fiscal  year,  because  the  financial  results  based  upon  book 
inventories  cannot  be  accepted  as  correct  without  this  veri- 
fication. 

If  the  stores  ledger  records  are  in  agreement  with  the 
corresponding  controlling  accounts,  a  test  should  be  made  of 
the  detailed  accounts  by  checking  their  balances  with  the 
merchandise  actually  on  hand  in  the  various  storerooms.  All 
merchandise  on  hand  in  the  raw  material,  finished  parts  stock, 
and  finished  stock  storerooms  should  be  verified  by  actual 
count  at  least  once  during  a  fiscal  period. 

In  verifying  the  balances  shown  upon  the  work  in  process 
accounts,  reference  must  be  made  to  the  detailed  uncompleted 
cost  sheets  of  the  various  jobs,  orders,  or  articles  in  the  course 
of  manufacture  or  to  the  detailed  uncompleted  process  cost 
records.  If  the  total  amounts  of  cost  as  obtained  from  these 
detailed  cost  sheets  and  cost  records  are  listed  and  added,  the 
result  obtained  should  be  in  agreement  with  the  balances  as 
shown  by  the  work  in  process  accounts.  However,  differences 
in  overhead  are  bound  to  occur.  The  overhead  applied  to  the 
detailed  cost  records  may  be  based  upon  a  fixed  rate  or  per- 
centage which  cannot  be  absolutely  correct — due  to  fluctuations 


FACTORY  LEDGER  CONTROL  335 

in  production  and  also  to  fluctuations  in  the  amount  of  over- 
head at  different  times  during  the  fiscal  period.  When  a  test 
is  made  of  the  balance  of  the  work  in  process  account,  con- 
sideration must  be  given  to  adjustments  of  this  overhead  rate. 

As  already  stated,  the  detailed  work  in  process  accounts 
should  provide  for  a  separate  verification  of  the  material,  labor, 
and  overhead  costs.  However,  the  verification  with  the  cost 
sheets  or  process  cost  records  does  not  complete  the  test.  The 
latter  must  be  verified  with  the  actual  uncompleted  work  in 
process  as  shown  by  reports  which  should  be  obtained  from 
the  various  foremen  or  factory  department  clerks. 

In  large  plants,  where  the  records  show  that  work  is  not 
being  done  regularly  upon  certain  jobs,  the  cost  sheets  relat- 
ing thereto  should  be  investigated  to  see  why  the  work  is  de- 
layed. This  investigation  often  leads  to  a  disclosure  of  dis- 
crepancies in  cost. 

Adjusting  Discrepancies  in  Cost 

The  verification  of  the  factory  accounts  with  the  subsid- 
iary records  and  with  actual  facts  as  they  exist  in  the  differ- 
ent storerooms  and  operating  departments  of  the  plant  usually 
discloses  discrepancies  which  are  bound  to  occur  in  the  opera- 
tion of  every  cost  system.  These  discrepancies  should  be  in- 
vestigated, and  if  they  cannot  be  properly  explained,  adjusting 
entries  should  be  made  upon  the  detailed  records  as  well  as 
upon  the  controlling  accounts  affected.  Such  entries  should 
not  be  postponed  until  the  end  of  the  fiscal  period.  All  in- 
ventory adjustments  should  be  made  through  an  Inventory 
Adjustment  account  so  that  these  items  may  be  shown  sepa- 
rately in  the  preparation  of  factory  and  financial  statements. 

Much  stress  is  sometimes  laid  upon  the  mathematical 
proof  of  a  cost  system  at  the  end  of  a  fiscal  period.  If  at  that 
time  a  single  adjustment  is  made  and  if  the  discrepancies 
represent  a  small  percentage  of  the  total  cost  of  production, 


336       CONTROLLING  THE  COST  RECORDS 

the  cost  expert  compliments  the  system,  and  incidentally  him- 
self. However  small  in  amount  the  discrepancies  may  be,  the 
fact  remains  that  they  may  cover  up  many  leaks,  which  if  in- 
vestigated during  the  fiscal  period  would  probably  have  led 
to  a  considerable  saving.  For  example,  some  items  of  stock 
may  be  in  excess  and  others  short  of  their  book  balances,  and 
when  an  accounting  is  made  at  the  end  of  the  fiscal  period  the 
excess  amounts  may  offset  the  shortages  to  the  extent  that  only 
a  small  net  amount  remains.  Thus,  the  amount  of  any  dif- 
ference is  not  always  a  true  index  of  the  efficiency  of  a  cost 
system  and  is  not  as  important  as  the  cause  which  produced 
the  difference.  Cost  systems  are  installed  for  the  purpose  of 
discovering  leaks  which  should  be  remedied.  Too  much  at- 
tention may  be  paid  to  proving  figures  rather  than  to  applying 
remedies  to  prevent  discrepancies. 

Closing  of  Factory  Ledger  Accounts 

Where  the  factory  ledger  accounts  form  part  of  the  gen- 
eral ledger,  the  closing  entries  are  made  through  a  Manufactur- 
ing account,  and  then  through  the  Profit  and  Loss  account. 
Adjusting  entries  affecting  the  raw  material,  work  in  process, 
and  finished  stock  accounts  are  made  after  a  physical  inventory 
is  taken  to  prove  the  book  balances  at  the  end  of  a  fiscal  period. 

Where  separate  factory  ledger  accounts  are  kept  they 
constitute  a  perpetual  inventory  and  the  closing  of  the  factory 
ledger  accounts  is  unnecessary.  Inventory  differences  should 
be  adjusted  when  the  discrepancies  are  discovered  by  tests 
made  during  the  fiscal  period.  Where  complete  physical  in- 
ventories are  not  taken  at  any  one  time,  it  is  assumed  that 
the  balances  as  shown  upon  the  factory  ledger  are  reliable  and 
accurate.  Adjusting  entries  are  always  made  when  conditions 
show  that  it  is  necessary  to  do  so.  All  adjusting  entries 
should  be  entered  in  an  Inventory  Adjustment  account,  which 


FACTORY  LEDGER  CONTROL 


337 


amount  should  be  absorbed  in  the  profit  and  loss  transactions 
when  the  regular  financial  accounts  are  closed. 

When  the  factory  ledger  accounts  are  closed  at  the  end 
of  each  fiscal  period,  the  detailed  factory  overhead  accounts 
should  be  credited  with  the  total  amount  debited  to  the  dis- 
tributed overhead  accounts.  As  the  credit  balances  of  the  dis- 
tributed overhead  accounts  offset  the  debit  balances  of  the 
current  factory  overhead  accounts,  the  closing  entries  above 
described  should  balance  the  factory  overhead  accounts.  As 
the  overhead  items  are  transferred  to  work  in  process  accounts, 
they  are  necessarily  included  as  part  of  the  merchandise  in- 
ventory. 


CHAPTER  XXI 
FINANCIAL  AND  FACTORY  STATEMENTS 

Time  and  Form  of  Preparation 

In  considering  the  kinds  of  statements  which  may  be  pre- 
pared from  cost  data,  attention  must  be  given  to  the  time  of 
their  preparation  as  well  as  their  form.  As  to  time,  they  may 
be  prepared  for  the  particular  cost  period  under  review  or  for 
the  current  fiscal  year  to  date  in  cumulative  form.  Reports 
of  a  special  character  dealing  with  matters  which  should  re- 
ceive the  prompt  attention  of  the  management  may  be  pre- 
pared daily,  weekly,  or  whenever  necessary.  As  to  form,  they 
may  either  be  statistical  or  graphic ;  that  is,  they  may  show  the 
results  and  operations  tabulated  by  means  of  figures  giving 
quantities  or  values,  or  both;  or  the  money  values  and  quan- 
tities may  be  shown  by  means -of  graphic  charts.  The  reports 
may  cover  a  particular  period  or  several  periods.  The  figures 
should  be  so  arranged  that  results  may  be  readily  compared 
and  also  be  reduced  to  percentages  or  rates  as  a  further  means 
of  making  comparisons. 

Kinds  of  Reports 

The  reports  which  may  be  prepared  from  the  information 
shown  by  a  comprehensive  cost  system  may  be  classified  under 
the  four  following  headings : 

1.  Reports  to  executives. 

2.  Reports  to  the  sales  department. 

3.  Reports  to  the  purchasing  department. 

4.  Reports  to  the  factory  superintendent  or  production 

manager. 

338 


FINANCIAL   AND    FACTORY    STATEMENTS 


339 


in  a  small  business  one  set  of  factory  and  financial  state- 
ments, prepared  at  the  end  of  a  definite  period,  usually  suffices 
for  the  needs  of  the  various  executives  and  department  heads. 
In  a  larger  business  the  statements  would,  of  course,  be  much 
more  numerous  and  extensive. 

Reports  to  Executives 

The  reports  covering  a  definite  period  which  may  be  sub- 
mitted to  executives  would  include  the  following : 

1.  Balance  sheet,  showing  the  financial  condition  of  the 

concern. 

2.  Profit  and  loss  statement,  showing  the  financial  opera- 

tions of  the  concern. 

3.  Manufacturing    statement,     showing    the    financial 

operations  of  the  factory.  This  statement  may 
be  combined  with  the  profit  and  loss  statement,  or 
it  may  be  prepared  upon  a  separate  form  and  con- 
tain more  detailed  information  as  to  the  results  of 
the  production. 

4.  Statement  of  merchandise  inventory. 

5.  Statement  showing  the  additions  to,  and  deductions 

from,  the  plant  and  equipment. 

Balance  Sheet 

The  balance  sheet  is  a  statement  of  assets,  liabilities,  and 
capital,  showing  the  financial  condition  of  the  concern,  and 
may  be  prepared  at  the  end  of  the  cost  period.  This  statement 
is  compiled  from  the  general  ledger  trial  balance,  with  the 
supporting  general  ledger  accounts,  and  should  be  arranged 
with  attention  to  some  definite  classified  form,  the  various 
classes  of  assets  and  liabilities  being  shown  under  separate 
captions.  The  different  methods  of  presenting  the  details  of 
the  balance  sheet  are  discussed  in  many  works  on  general 
accounting  and  need  not  be  considered  here.     It  is  only  neces- 


340  CONTROLLING  THE   COST    RECORDS 

sary  to  assert  that  the  statement  should  show  the  following 
information : 

On  the  assets  side:  (i)  the  current  assets  of  cash,  ac- 
counts receivable,  and  bills  receivable;  (2)  working  and  trad- 
ing assets,  which  would  include  the  information  as  to  the  vari- 
ous classes  of  merchandise  inventory;  (3)  investments  in 
stocks,  bonds,  and  any  miscellaneous  outside  investments;  (4) 
fixed  assets,  such  as  land,  buildings,  machinery,  tools,  furni- 
ture, fixtures,  and  equipment ;  ( 5  )  fixed  intangible  assets,  such 
as  good-will,  patents,  copyrights,  trade-marks,  and  items  of  a 
similar  character;  (6)  deferred  charges,  which  would  include 
unexpired  insurance  premiums,  prepaid  rents,  prepaid  interest, 
and  other  prepaid  expenses  chargeable  to  later  operations. 

On  the  liabilities  side :  ( i )  the  current  liabilities  of  notes 
and  accounts  payable:  (2)  miscellaneous  loans  of  stockholders 
or  partners  which  are  more  or  less  fixed  in  character ;  (3)  fixed 
liabilities,  such  as  bonded  indebtedness  and  mortgages;  (4) 
reserves,  which  include  contingent  reserves  or  provision  for 
probable  losses  (if  these  items  are  deductible  from  the  asset 
values,  they  may  appear  as  deductions  from  the  assets  on  bal- 
ance sheet)  ;  (5)  capital  stock,  or  the  capital  accounts  showing 
the  partners'  or  proprietor's  investment  in  the  business;  (6) 
surplus,  if  the  organization  is  a  corporation.  If  a  deficit  exists, 
the  amount  may  be  shown  in  red  ink  upon  the  liabilities  side, 
or  provision  may  be  made  for  showing  it  as  a  separate  amount 
upon  the  assets  side.  When  it  appears  upon  the  assets  side, 
care  should  be  exercised  to  be  sure  that  the  total  amount  of  the 
assets  is  shown  separately  before  considering  the  deficit. 

The  items  on  the  balance  sheet  should  be  arranged  in  a 
methodical  and  predetermined  order,  depending  to  a  large 
extent  upon  the  significance  of  the  information  to  the  business. 
Form  76  is  a  form  of  balance  sheet  which  illustrates  the  ar- 
rangement sometimes  followed  by  large  manufacturing  con- 
cerns. 


FINANCIAL   AND   FACTORY    STATEMENTS 


341 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

COMPARATIVE  BALANCE  SHEET 


Details 


Assets: 

Petty  Cash  Fund 

First  National  Bank 

City  Trust  Company 

Salesmen's  Cash  Funds 

Branch  Office  Cash  Funds 

Accounts  Receivable 

Notes  Receivable 

Merchandise  Inventory 

Land 

Buildings 

Factory  Machinery  and  Equipment 

Factory  Small  Tools 

Office  Equipment 

Deferred  Charges 

Total  Assets 

Liabilities: 

Notes  Payable 

Accounts  Payable 

Loans 

Accrued  Salaries  and  Wages 

Accrued  Interest 

Accrued  Taxes 

Mortgage 

Total  Liabilities 

Reserves: 

Depreciation 

Doubtful  Accounts 

Capital  Stock 

Surplus 

Net  Income  to  Date 

Total  Liabilities  and  Capital 


(Date  of 

end  of 

Current 

Month) 


(Date  of 

end  of 

Previous 

Month) 


Increase 

OR 

Decrease 


Form  76.    Balance  Sheet.     (Size.  8  x  16.) 


342 


CONTROLLING   THE   COST   RECORDS 


Profit  and  Loss  Statement 

A  profit  and  loss  statement  is  compiled  to  show  the  finan- 
cial operations  of  a  business  represented  by  income,  costs,  and 
expenses.  A  quite  simple  form  of  profit  and  loss  statement 
is  illustrated  in  Form  yj.  This  may  be  supplemented  by  sup- 
porting schedules  showing  the  data  in  greater  detail. 

In  cases  where  sales  are  divided  into  several  classifica- 
tions, both  the  sales  and  cost  of  sales  should  be  analyzed  by 
departments,  and  the  gross  profit  in  each  case  may  then  readily 
be  ascertained.  In  determining  the  net  profit  from  the  opera- 
tion of  each  sales  department,  consideration  must  be  given  to 
its  proportion  of  the  selling  and  administrative  expenses.  The 
distribution  of  these  expenses  is  usually  based  upon  the  per- 
centage which  the  cost  of  sales  of  each  department  bears  to  the 
total  cost  of  all  sales.  As  in  the  case  of  factory  overhead 
items,  as  many  as  possible  of  the  detailed  items  of  selling  and 
administrative  expenses  should  be  charged  directly  to  the  de- 
partments to  which  they  are  applicable.  For  example,  under 
certain  conditions  the  commission  rates  allowed  salesmen  upon 
different  products  sold  often  vary,  in  which  case  an  analysis 
of  the  commissions  paid  should  be  made  so  that  each  sales 
department  may  be  charged  with  its  correct  proportion. 

Often  the  sales  departments  or  classifications  are  so  well 
established  that  the  salaries  of  their  personnel  may  be  charged 
to  them  directly  rather  than  distributed  upon  some  arbitrary 
basis.  Office  rent  may  also  be  distributed  on  the  basis  of  the 
floor  space  used  in  the  general  or  sales  offices  for  the  different 
classes  of  product  sold.  The  remaining  items  of  selling  and 
administrative  expenses  are  usually  distributed  arbitrarily. 

Arbitrary  distribution  methods  may  affect  the  compensa- 
tion of  individuals  in  the  organization  whose  income  is  derived 
from  the  sales  of  certain  products.  For  that  reason,  this 
method  of  distributing  the  selling  and  administrative  ex- 
penses leads  to  argument  when  the  charge  to  a  particular  de- 


FINANCIAL   AND   FACTORY   STATEMENTS  343 

partment  is  considered  an  excessive  burden.  To  avoid  con- 
troversy the  charge  is  often  based  on  a  predetermined  percen- 
tage. If  this  is  done  it  may  be  found,  when  the  books  are 
closed  at  the  end  of  the  period,  that  some  of  the  items  have 
been  over-absorbed  and  others  under-applied.  Adjustments 
will  then  have  to  be  made  by  distributing  the  difference  over 
departments  upon  an  arbitrary  basis,  or  the  net  amount  of  the 
difference  may  be  deducted  from  or  added  to  the  total  profits. 

The  profit  and  loss  statement  is  prepared,  as  a  rule,  from 
the  general  ledger  accounts  unless  these  show  totals  which 
control  detailed  subsidiary  ledgers  or  analysis  records.  In 
this  case  reference  must  necessarily  be  made  to  the  supporting 
records  before  a  complete  profit  and  loss  statement  can  be  pre- 
pared. 

If  the  statements  are  prepared  for  the  fiscal  period  to 
date,  the  figures  of  the  general  ledger  trial  balance  may  be 
used.  On  the  other  hand,  if  the  transactions  cover  the  current 
cost  period  only,  the  data  appearing  on  the  statements  would 
be  obtained  from  the  ledger  accounts  unless  a  general  ledger 
trial  balance  is  taken  at  the  end  of  each  month.  The  differ- 
ence between  the  ending  and  beginning  balances  of  the  income 
and  expense  acounts  shows  the  net  amount  of  the  transactions 
for  the  period  as  entered  on  the  profit  and  loss  statement. 

Manufacturing  Statement 

The  manufacturing  statement  may  be  made  out  sepa- 
rately, or  combined  with  the  profit  and  loss  statement,  and 
where  this  is  done,  it  is  termed  a  "Manufacturing  and  Profit 
and  Loss  Statement."  When  made  out  separately  it  is  termed 
"Statement  of  Factory  Expenditures"  or  "Statement  of  Fac- 
tory Operations."  The  data  for  its  preparation  would  be  ob- 
tained from  the  controlling  factory  cost  accounts,  kept  either 
in  the  general  ledger  or  in  the  subsidiary  factory  ledger. 

In  the  profit  and  loss  statement  the  departmental  divi- 


344 


CONTROLLING   THE   COST   RECORDS 


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FINANCIAL  AND   FACTORY   STATEMENTS 


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346  CONTROLLING   THE   COST    RECORDS 

sions  are  based  on  the  classification  of  the  product.  In  the 
manufacturing  statement  they  are  based  on  the  departments  of 
the  factory,  and  therefore  would  cover :  ( i )  movement  of  the 
material  in  the  various  raw  material  storerooms;  (2)  the 
charges  and  credits  affecting  the  manufacturing  departments; 
(3)  the  movement  of  the  merchandise  kept  in  the  various 
finished  stock  storerooms. 

Form  78  is  a  simple  form  of  manufacturing  statement 
which  shows  the  inventories  of,  and  the  charges  and  credits 
affecting,  the  operating  departments,  the  raw  material,  and 
the  finished  stock.  This  form  of  statement  may  be  expanded 
to  show  a  summary  of  the  total  of  all  of  these  transactions, 
supported  by  detailed  schedules  for  each  operating  department. 

The  section  which  deals  with  the  transactions  affecting 
the  operating  departments  shows:  (i)  the  cost  of  the  work 
in  process,  and  the  inventory  at  the  beginning  of  the  month; 
(2)  the  charges  for  the  material  requisitioned  from  stock,  this 
amount  being  in  agreement  with  the  amount  of  material  requi- 
sitioned as  shown  by  the  section  dealing  with  the  storeroom 
operations;  (3)  the  productive  labor  charged  to  the  operating 
departments;  (4)  the  items  of  indirect  expenses  charged  to 
departments. 

From  the  total  of  the  above  charges  is  deducted  the  pro- 
duction of  finished  stock,  which  should  be  in  agreement  with 
the  amount  charged  to  finished  stock. 

The  section  covering  the  raw  material  transactions  starts 
with  the  opening  inventory — which  should  be  in  agreement 
with  the  inventory  records  and  the  previous  report — and 
shows  the  purchases  and  other  charges  to  the  raw  material 
ledger.  After  deducting  the  total  amount  of  material  requi- 
sitioned, which  should  be  in  agreement  with  the  amount 
charged  to  the  operating  departments,  the  balance  of  the  in- 
ventory on  hand  at  the  end  of  the  period  is  known. 

The  section  dealing  with  the  finished  stock  operations  also 


FINANCIAL  AND  FACTORY   STATEMENTS 


347 


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348  CONTROLLING   THE   COST   RECORDS 

shows  the  inventory  on  hand  at  the  beginning  of  the  period 
and  the  charges  for  production,  the  total  of  which  should  be 
in  agreement  with  the  amount  credited  to  the  operating  de- 
partments. From  the  total  inventory  and  production  is  de- 
ducted the  cost  of  the  sales,  which  amount  should  be  in  agree- 
ment with  the  cost  of  sales  as  shown  in  the  profit  and  loss 
statement.  The  resulting  balance  represents  the  amount  of 
the  finished  stock  inventory  at  the  end  of  the  period.  The 
inventory  balance  for  each  section  should  be  in  agreement  with 
the  amount  of  inventory  as  shown  on  the  balance  sheet. 

The  form  of  manufacturing  statement  here  illustrated  is 
appropriate  for  use  in  small  industries.  Where  the  operating 
departments  and  the  classifications  of  raw  material  and  fin- 
ished goods  are  numerous,  a  single  form  designed  to  contain 
all  the  information  may  be  cumbersome.  Under  these  circum- 
stances, several  statements  would  have  to  be  prepared,  giving 
the  information  in  detail  for  each  department  and  for  each 
classification  of  the  material  and  product  manufactured. 

Trading  Statement 

In  mercantile  concerns  a  trading  statement  is  prepared  in 
place  of  a  manufacturing  statement,  to  show  the  trading  opera- 
tions and  results  for  the  period  under  review.  These  transac- 
tions are  often  combined  with  the  transactions  shown  in  the 
profit  and  loss  statement,  and  in  that  case  the  statement  is 
known  as  a  "Trading  and  Profit  and  Loss  Statement." 

The  trading  statement  shows  the  sales  and  the  cost  of 
sales  for  the  period,  the  information  for  this  cost  being  ob- 
tained in  the  following  manner: 

I.  To  the  opening  inventory  are  added: 

(a)  Current  merchandise  purchases. 

(b)  Freight  and  cartage  inward. 

(c)  Duty  and  import  expenses,  if  any. 

(d)  Any  other  items  of  cost. 


FINANCIAL   AND   FACTORY    STATEMENTS  349 

2.  From  the  sum  of  the  above  items  is  deducted  the  value 
of  the  closing  inventory.  The  resulting  figure 
represents  the  cost  of  sales. 

Statement  of  Merchandise  Inventory 

In  large  manufacturing  plants  it  is  often  essential  to  know 
the  capital  invested  in  the  merchandise  inventory,  in  which  case 
a  statement  showing  the  amount  of  the  inventory  of  each  of 
the  raw  material,  work  in  process,  finished  parts,  and  finished 
stock  classifications  should  be  prepared.  This  information  is 
obtained  from  the  factory  accounts,  as  already  noted,  which 
may  be  kept  in  either  the  general  ledger  or  a  subsidiary  factory 
ledger. 

Form  79  represents  a  form  of  statement  upon  which  the 
information  as  to  the  merchandise  inventory  may  be  so  ar- 
ranged as  to  show  quantities  on  hand  as  well  as  cost  values. 
Under  some  conditions  it  is  not  always  necessary  to  list  the  de- 
tailed classifications  of  the  inventory  in  detail,  it  being  suffi- 
cient to  show  items  of  a  doubtful  character  or  those  which 
should  be  brought  to  the  attention  of  the  executive. 

Statement  of  Changes  in  Plant  and  Equipment 

While  the  value  of  the  merchandise  inventory  is  usually 
fairly  presented  in  the  statements  made  out  at  the  end  of  a  cost 
period,  in  many  cases  fluctuations  in  the  value  of  plant  and 
equipment  are  ignored  until  the  end  of  the  calendar  or  fiscal 
year.  Arbitrary  depreciation  rates,  depending  upon  the  finan- 
cial results  of  the  business,  are  then  often  established.  If  the 
profit  is  large,  a  liberal  allowance  for  depreciation  is  made ;  if 
the  profit  is  small  or  only  a  fair  amount,  there  may  be  a  cor- 
respondingly small  deduction  for  depreciation.  When  changes 
in  the  value  of  plant  assets  during  the  year  are  ignored,  re- 
pairs or  maintenance  charges  which  should  be  absorbed  in  the 
factory  overhead  are  often  capitalized. 


350 


CONTROLLING   THE   COST   RECORDS 


COMPARATIVE  STATEMENT  OF 
MERCHANDISE  INVENTORY 

For 19 

Details 

(Ending 
Date  of 
Current 
Period) 

(Endins; 

Date  of 
Previous 

Period) 

Increase 

or 
Decrease 

Summary  of  Totals: 
Raw  Material 

Work  in  Process. 

Finished  Parts 

Finished  Stock. 

Total 

Raw  Material: 
Lumber                   

Paints  and  Varnishes 

Steel  Parts     

Other  Raw  Material 

General  Supplies 

Total 

Work  in  Process: 
Cutting  Department 

Machine  Department: 
Special  Work          

Standard  Work         

Assembling  Department: 

Sf)ecial  Work       

Standard  Work        

Finishing  Room 

Trimming  Department 

Inspecting  Department 

Packing  Department    

Total 

=z 

=r 

Finished  Parts: 
Sides 

Etc 

Total 



Finished  Stock: 

Chairs        

Etc 

Total 



■  ■■; 

Form  79.  Comparative  Statement  of  Merchandise  Inventory.   (Size,  8  x  i6.) 


FINANCIAL   AND   FACTORY    STATEMENTS 


351 


In  order  that  the  management  may  be  kept  informed  of 
the  cost  of  the  up-keep  of  the  building,  plant,  and  equipment,  a 
statement  should  be  compiled  to  show  any  important  changes 
in  these  asset  values.  Such  a  statement  may  not  be  necessary 
when  additions  to  plant  and  equipment  are  slight,  but  where 
the  value  of  the  assets  fluctuates  from  one  period  to  another, 
as  it  usually  does  in  large  plants,  a  statement  similar  to  Form 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  CHANGES  IN  PLANT  85  EQUIPMENT 

For 19 

Details  of  Changes 

Amounts 

New  Equipment  Purchased: 

New  Equipment  Manufactured: 

Equipment  Destroyed: 

Other  Plant  Changes: 

Remarks: 

1 

Form  To.    Statement  of  Changes  in  Plant  and  Equipment.   (Size,  8  x  16.) 


352 


CONTROLLING  THE  COST  RECORDS 


80  should  be  prepared  to  show  the  amount  of  these  valuation 
changes.  If  complete  plant  asset  records  are  kept,  the  state- 
ment can  be  prepared  in  detail  from  these  records,  the  entry  of 
transactions  relating  thereto  being  shown  in  total  on  the  con- 
trolling accounts  in  the  general  or  private  ledger.  Another 
useful  purpose  of  this  statement  is  that  the  information  it  con- 
tains often  serves  as  a  check  on  the  unnecessary  purchases  of 
equipment,  revealing  as  it  does  the  value  of  the  equioment  in 
each  department. 

Reports  to  the  Sales  Departments 

The  reports  to  the  sales  departments  may  include : 

1.  Statement  of  salesmen's  sales,  costs,  and  expenses. 

2.  Statement  of  production,  shipments,  and  inventory  of 

finished  stock. 

3.  Daily  statement  of  sales  and  costs. 

4.  Statement  of  special  items  showing  low  margin  of 

gross  profits  or  gross  losses. 

5.  Statement  of  sales,  actual  costs,  and  estimated  costs. 

6.  Statement  of  obsolete  and  slow-moving  finished  stock. 

Statement  of  Salesmen's  Sales,  Costs,  and  Expenses 

A  statement  showing  the  sales,  cost  of  sales,  expenses, 
and  profit  of  individual  salesmen,  or  of  a  particular  territory, 
is  a  valuable  means  of  judging  the  efficiency  of  the  sales  or- 
ganization. In  a  small  business,  this  statement  may  usually 
be  prepared  from  the  information  shown  on  general  ledger 
accounts  and  be  supported  by  detailed  analyses.  In  a  large 
business  analytical  records  should  be  kept  to  show  the  current 
sales  of  each  salesman — which  are  proved  with  the  total  net 
sales  as  shown  by  the  sales  and  return  sales  summaries — and 
the  cost  of  sales.  This  information  clearly  reveals  the  amount 
of  business  done  by  each  salesman,  and  the  cost  of  the  business 
is  proved  with  the  cost  of  sales  account  in  the  general  ledger. 


FINANCIAL   AND   FACTORY    STATEMENTS  353 

The  expenses  and  commissions  of  each  salesman  may  be 
shown  in  separate  general  ledger  accounts.  Sometimes,  how- 
ever, details  as  to  commissions  and  expenses  are  kept  in  a  sub- 
sidiary analysis  record,  which  should  be  in  agreement  with  the 
total  of  the  salesmen's  expenses  and  commission  accounts  as 
shown  on  the  general  ledger.  A  statement  of  this  character  is 
valuable  as  a  means  of  ascertaining  the  rates  of  commissions 
to  be  allowed  on  the  different  products  sold  and  as  a  guide  in 
awarding  a  bonus  for  exceptional  effort  on  the  part  of  indi- 
vidual salesmen. 

Form  81  is  a  simple  form  which  provides  the  spaces  and 
columns  for  recording  the  sales,  cost  of  sales,  and  expenses  of 
individual  salesmen.  Other  columns  may  be  added,  to  show 
daily  averages  of  the  sales,  costs,  and  expenses,  as  a  means  of 
judging  whether  or  not  the  traveling  and  hotel  expenses  of  an 
individual  salesman  are  excessive.  It  follows  that  a  statement 
of  this  character  may  be  used  to  advantage  in  adjusting  sales- 
men's commissions  and  expense  allowances. 

In  many  businesses,  sales  also  originate  through  a  mail- 
order or  through  showroom  orders,  in  which  case  they  may  not 
be  credited  to  an  individual  salesman.  Where  a  mathematical 
proof  of  the  bookkeeping  work  is  required,  all  orders  which 
are  received  direct  in  the  above  way  should  be  grouped  under 
a  caption  termed  "Miscellaneous  Sales."  This  method  pro- 
vides for  proving  the  totals  of  the  sales  when  an  analysis  is 
made. 

It  will  be  noted  that  Form  81  shows  a  column  for  net  sales 
only.  Under  some  conditions  it  may  be  well  to  provide  for 
columns  showing  gross  sales,  returns  and  allowances,  and  net 
sales.  If  discount  rates  differ  upon  the  various  products  manu- 
factured, columns  should  also  be  provided  for  recording  the 
rate  and  the  amount  of  discount  to  be  deducted  from  the  sales 
in  order  to  ascertain  the  profit  resulting  from  the  business  done 
by  each  salesman. 


354 


CONTROLLING  THE   COST   RECORDS 


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FINANCIAL  AND  FACTORY   STATEMENTS  355 

Statement  of  Production,  Shipments,  and  Inventory  of  Fin- 
ished Stock 

The  statement  which  shows  the  condition  of  the  merchan- 
dise inventory  and  the  movements  of  finished  stock  has  been 
discussed  under  the  head  of  reports  to  executives.  It  is  often 
desirable  to  submit  a  similar,  but  more  detailed,  statement  to 
the  sales  department,  showing  the  cost  value  of  the  current 
production,  shipments,  and  inventory  of  the  finished  stock 
items,  as  illustrated  in  Form  82.  Columns  are  provided 
thereon  for  recording  the  inventory  at  the  beginning  of  the 
period,  to  which  should  be  added  the  cost  of  current  produc- 
tion. The  total  of  these  two  columns  is  entered  in  the  total 
amount  column,  and  the  deduction  for  the  cost  of  the  current 
shipments  in  a  fourth  column.  The  resulting  balance,  which 
represents  the  inventory  on  hand  at  the  end  of  the  period,  is 
entered  in  the  last  column.  This  statement  may  be  prepared 
either  for  all  of  the  various  classifications  of  the  product,  or 
for  only  those  items  which  should  receive  the  special  attention 
of  the  sales  department  so  that  an  additional  effort  may  be 
made  to  sell  lines  which  are  becoming  obsolete  or  which  are 
slow-moving. 

Daily  Statement  of  Sales  and  Cost  of  Sales 

It  is  often  advisable  to  prepare  a  daily  statement  (Form 
83)  of  sales,  cost  of  sales,  and  gross  profits  as  an  aid  to  the 
sales  department  in  judging  the  efficiency  of  the  sales  force. 
If  the  product  manufactured  is  standard  and  the  articles  in  the 
line  are  numerous,  such  a  statement  may  present  an  extensive 
classification  of  the  product.  For  example,  it  may  show  the 
shipments  of  each  line  and  the  returned  merchandise  sepa- 
rately, so  as  to  establish  a  proof  of  the  financial  statements 
when  they  are  prepared  at  the  end  of  the  cost  period ;  or  it  may 
be  prepared  for  special  lines  only  which  show  a  loss  or  a  poor 
margin  of  profit.     The  detailed  routine  of  a  complete  cost  sys- 


356 


CONTROLLING  THE   COST   RECORDS 


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358 


CONTROLLING   THE   COST   RECORDS 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  SALES  SHOWING  LOSSES  AND 
SMALL  PROFITS 

For 19 

Name  of  Customer 

AND 

Nature  of  Sale 

Sales 

Cost 

OF 

Sales 

Gross 
Profit 
OR  Loss 

Per 

Cent 

Totals 

= 

— 

Form  84.    Statement  of  Sales,  Showing  Profit  or  Loss  on  Special  Items. 

(Size,  9  X  16.) 


tern  should  provide  a  means  of  bringing  such  items  to  the 
attention  of  the  management.  At  the  end  of  the  month,  there- 
fore, it  is  well  to  tabulate  these  items  in  statement  form  for  the 
purpose  of  submitting  them  to  the  sales  department,  which  can 
then  dispose  of  them  as  seems  fit. 

The  reason  for  the  poor  margin  of  profit  or  the  reason  for 
the  gross  losses  should  also  be  stated.  It  may  be  due  to  an  in- 
accurate estimate  of  the  selling  price,  or  to  extraordinary  con- 
ditions affecting  the  material,  labor,  or  overhead  costs. 

Form  84  may  be  used  for  preparing  a  statement  showing 
Khe  results  of  gross  profit  or  loss  upon  special  items  or  lines. 


FINANCIAL   AND   FACTORY    STATEMENTS 


359 


Statement  of  Sales,  Actual  Costs,  and  Estimated  Costs 

A  check  upon  the  work  done  by  the  estimating  department 
is  always  advisable,  and  this  may  be  accomplished  by  a  state- 
ment which  compares  actual  with  estimated  costs.  Such  a 
report  is  very  valuable  where  special  products  are  manufac- 
tured for  the  individual  requirements  of  customers,  or  where 
bids  are  offered  and  prices  are  based  upon  an  estimate  of 
costs. 

The  statement  should  give  the  order  number,  a  descrip- 
tion of  the  product  manufactured,  and  sales  or  contract  prices, 
while  the  actual  cost  and  estimated  cost  of  each  order  should 
be  tabulated  in  separate  columns.  It  may  also  be  well  to 
furnish  a  detailed  comparison  of  the  elements  of  cost;  that  is, 
the  actual  material,  labor,  and  overhead  costs  on  each  order 
may  be  compared  with  the  estimated  costs  of  these  items.  In 
this  way,  the  cause  of  any  errors  in  the  estimate  is  often  dis- 
covered. Some  estimating  clerks  may  be  fairly  well  informed 
as  to  labor  cost  but  may  take  too  much  for  granted  when  esti- 
mating the  material  requirements.  Or  again,  it  may  be  found 
that  changes  in  overhead  rates  are  responsible  for  the  errors 
in  making  up  the  original  estimate  of  costs. 

In  this  connection  it  is  important  to  emphasize  the  neces- 
sity of  co-operation  between  the  cost  and  estimating  depart- 
ments. The  cost  department  can  be  of  assistance  to  the  esti- 
mating department  when  items  of  a  similar  character  are 
manufactured  or  when  a  request  is  received  for  an  estimate 
on  an  order  which  was  manufactured  some  years  ago.  The 
cost  department  records  should  be  accessible  to  the  estimating 
department,  and  if  co-operation  exists  between  the  two,  a 
better  basis  obtains  for  providing  the  sales  department  with 
the  figures  needed  to  make  a  satisfactory  selling  or  contract 
price. 

Form  85  is  a  simple  form  which  may  be  used  for  report- 
ing the  information  as  to  sales,  actual  costs,  and  estimated 


36o 


CONTROLLING  THE   COST   RECORDS 


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FINANCIAL  AND   FACTORY   STATEMENTS 


361 


costs.     This  form  may  be  developed  by  the  addition  of  other 
columns  to  show  departmental  costs  when  these  are  desired. 

Statement  of  Obsolete  or  Slow-Moving  Finished  Stock 

When  it  is  more  advantageous  to  have  the  information  ai 
to  obsolete  or  slow-moving  stock  appear  upon  a  separate  state* 
ment,  this  may  be  prepared  in  addition  to  the  statement  of  pro- 
duction, shipments,  and  inventory  of  finished  stock  which  has 
been  previously  mentioned.  A  statement  of  this  kind  should 
show  quantities  as  well  as  costs.  The  tendency  in  most  fac- 
tories is  to  allow  obsolete  articles  and  material  to  accumulate 
for  a  long  period,  no  effort  being  made  to  dispose  of  them. 
Such  obsolete  stock  and  material  may  form  part  of  the  inven- 
tory year  after  year.     As  a  rule,  it  is  only  brought  to  the  atten- 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  OBSOLETE  FINISHED  STOCK  ITEMS 
For 19 

Style  or 

Grade 

No. 

Description  of  Article 

Quantity 

Value 

. 


Form  86.    Statement  of  Obsolete  or  Slow-Moving  Stock.     (Size,  8  x  n.) 


362  CONTROLLING  THE   COST   RECORDS 

tion  of  the  management  when  an  inventory  is  taken  at  the  end 
of  the  fiscal  period,  and  often,  under  these  circumstances,  no 
definite  decision  is  reached  as  to  its  disposal.  If  the  cost  sys- 
tem provides  for  the  preparation  of  a  special  report  on  these 
items  at  the  end  of  definite  periods,  this  helps  to  arouse  the 
sales  department  to  action  and  leads  to  the  disposal  of  those 
items  which  are  salable.  Form  86  may  be  used  to  show  the 
value  of  the  obsolete  finished  stock  items. 

Reports  to  the  Purchasing  Department 

Not  much  is  required  in  the  way  of  reports  to  the  pur- 
chasing department,  as  this  department  is  chiefly  interested  in 
the  raw  material  and  supplies  on  hand,  concerning  which  in- 
formation can  readily  be  obtained  from  the  stores  ledger. 
This  information  may  be  supplemented  by  the  following  re- 
ports : 

1.  Statement  of  merchandise  purchases  and  inventory  of 

raw  materials. 

2.  Statement  of  obsolete  raw  materials. 

3.  Statement  of  maximum  and  minimum  quantities  com- 

pared with  the  inventory  quantities. 

The  above  statements,  which  may  all  be  prepared  from 
the  information  shown  by  the  stores  ledger  accounts,  give  par- 
ticulars of  each  item  composing  the  raw  material  inventory — 
unless  the  classification  of  materials  is  so  extensive  that  it  is 
practicable  to  call  the  attention  of  the  management  only  to 
items  of  an  extraordinary  character. 

Form  87  summarizes  the  purchases  and  inventory  of  each 
class  of  raw  material.  It  may  readily  be  expanded  to  give 
further  information  as  to  the  material  used  during  the  period 
or  month.  In  that  event  the  inventories  on  hand  at  the  be- 
ginning and  end  of  the  period,  together  with  the  purchases  for 
the  period,  would  provide  the  purchasing  department  with  a 


FINANCIAL  AND  FACTORY  STATEMENTS 


363 


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AND 

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MM 

THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  MERCHANDISE  PURCHASES  AN 

For                      TQ 

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CONTROLLING  THE   COST   RECORDS 


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THE  BROWN  MANUFACTURING  C( 
New  York,  N.  Y. 

STATEMENT  OF  OBSOLETE  RAW  MATE 

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FINANCIAL  AND   FACTORY   STATEMENTS 


365 


basis  for  judging  whether  or  not  the  factory  was  overstocked 
on  any  particular  item. 

If  data  as  to  the  obsolete  stock  of  raw  materials  on  hand 
does  not  appear  upon  the  above  statement,  a  special  report  of 
these  items  should  be  submitted  explaining  why  they  are  not 
being  used.  If  they  cannot  be  used  in  the  course  of  manufac- 
ture, or  if  they  cannot  be  substituted  for  other  items,  some  de- 
cision should  be  reached  as  to  their  disposal.  Form  88  is  a 
simple  form  for  reporting  the  value  of  obsolete  stock. 

The  third  statement  listed  above  which  compares  the 
maximum  and  minimum  quantities  with  the  inventory  quanti- 
ties of  the  raw  material  items  furnishes  valuable  information 
for  estimating  the  material  requirements  of  the  factory  in  the 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  INVENTORY  QUANTITIES 

For 10 

1 

Article 
No. 

Description 

OF 

Article 

Inven- 
tory 
Qty. 

Maxi- 
mum 
Qty. 

Mini- 
mum 
Qty. 

Over 

or 
Short 

Form  89.    Statement  of  Maximum  and  Minimum  and  Actual  Quantities. 

(Size,  8  X  II.) 


366  CONTROLLING   THE   COST   RECORDS 

near  future.  The  first  essential  step  towards  efficiency  in  the 
purchasing  department  is  to  insure  an  adequate  stock  of  raw 
materials  and  supplies  so  that  the  material  needed  for  definite 
orders  may  be  promptly  available.  Orders  must  be  completed 
on  the  date  promised  if  customers  are  to  be  satisfied.  A  com- 
parison of  the  maximum  quantities  with  inventory  quantities 
may  also  show  that  the  factory  is  overstocked  on  some  items 
and  thus  enable  the  proper  balance  to  be  struck  between  suffi- 
ciency and  surplus  or  excess.  The  information  for  this  report 
may  be  shown  satisfactorily  upon  a  form  similar  to  Form  89. 

Reports  to  Factory  Superintendent  and  Production  Manager 

Reports  to  the  factory  superintendent  and  production 
manager  should  cover  every  phase  which  reflects  the  efficiency 
of  the  manufacturing  departments,  and  may  include: 

1.  Statement  of  costs  and  production. 

2.  Statement  of  labor  statistics  and  cost  averages. 

3.  Statement  of  oboolete  orders  in  process. 

4.  Statement  of  factory   expenses   composing   the   fac- 

tory overhead. 

5.  Statement  of  machine    statistics     showing    repairs, 

shut-downs,  etc. 

Statement  of  Costs  and  Production 

A  detailed  statement  of  costs  and  production  may  be 
prepared  for  each  operating  department,  and  in  some  cases  it 
may  be  practicable  to  combine  the  information  upon  one  form. 
The  report  would  be  prepared  from  the  work  in  process  ac- 
counts and  should  summarize  and  analyze  the  material,  labor, 
and  overhead  items  of  cost  by  kinds  and  classes  of  product,  as 
illustrated  in  Form  90.  If  the  inventory  on  hand  at  the  be- 
ginning and  end  of  the  period  is  also  shown,  this  enables  the 
factory  superintendent  to  judge  whether  or  not  too  much  work 
in  process  is  accumulating  in  the  plant.     Reports  of  this  char- 


FINANCIAL   AND   FACTORY   STATEMENTS 


367 


STATEMENT  OF  COSTS  AND  PRODUCTION 

Department 

For 19 

Details  of  Charges 

Current 
Period 

Previou 
Period 

Increase 
s         or 
Decrease 

Material  Charges 

Productive  Labor  Charges 

Overhead  Charges: 

Supervision 

Non-Productive  Labor 

Repairs 

Depreciation 

Insurance 

Taxes  

Rent           

Supplies 

Defective  Work 

Experimental  Work 

Light,  Heat,  and  Power 

Sundry  Expenses 

Total  Charges 

SUMMARY  OF  CHARGES 

Details 

Total 

Material 

Labor 

Overhead 

Work  in  Process  (Beginning) 

Total  Charges  (as  above) 

— 

— 

— 

— 

Total..                 

Work  in  Process  (Ending) 

Balance  (Production) 

PRODUCTION 

Details 

Current 
Period 

Previou 
Period 

Increase 
5         or 
Decrease 

Standard  Production: 
Desks 



i 

— 

Etc 

Special  Production: 

Cabinets 

Other  Work 

Totals 

1 

.....  . 

Form  90.    Statement  of  Costs  and  Production.     (Size,  9  x  16.) 


368  CONTROLLING  THE   COST   RECORDS 

acter,  when  compared  with  those  of  previous  periods,  often 
show  discrepancies  in  cost  charges. 

If  possible,  a  statement  of  production  and  costs  should 
show  the  quantities  of  articles  manufactured  where  the  product 
is  made  for  stock  or  where  process  costs  are  required.  Aver- 
age unit  costs  may  then  be  obtained  and  can  be  used  as  a  check 
on  the  efficiency  of  the  operating  departments. 

Statement  of  Labor  Statistics  and  Cost  Averages 

Form  91  may  be  used  for  presenting  labor  statistics  and 
cost  averages,  such  as  the  number  of  productive  and  non-pro- 
ductive employees  in  each  operating  department,  total  wages 
paid  during  the  period,  average  daily  and  weekly  wages  paid. 
The  labor  statistics  may  be  elaborated  further  by  showing 
the  number  of  employees  at  the  beginning  of  the  period,  num- 
ber of  new  employees  added,  and  number  of  employees  who 
have  left.  Information  of  this  character  is  valuable  as  a 
means  of  estimating  tendencies  in  the  labor  market.  For  ex- 
ample, it  may  be  discovered  from  the  statistics  that  more  men 
than  usual  leave  at  certain  times  during  the  year,  when  perhaps 
the  labor  market  shows  a  shortage.  At  other  times  there  may 
be  an  abundant  labor  supply  and  the  reports  may  show  that 
few  employees  leave  the  shops  during  that  particular  period. 
Such  information  is  a  valuable  aid  in  judging  whether  or  not 
new  business  should  be  added  to  the  regular  production  at  cer- 
tain periods  of  the  year. 

Statement  of  Obsolete  Orders  in  Process 

Obsolete  or  slow-moving  uncompleted  orders  in  process 
should  be  called  to  the  attention  of  the  factory  superintendent 
upon  a  report  similar  to  Form  92.  Information  for  preparing 
this  report  is  obtained  from  the  uncompleted  cost  sheets  and 
other  cost  records.  Orders  sometimes  go  astray  or  are  lost 
in  the  course  of  manufacture,  yet  the  uncompleted  cost  sheets 


FINANCIAL   AND   FACTORY    STATEMENTS 


369 


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370 


CONTROLLING  THE  COST  RECORDS 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  OBSOLETE  ORDERS  IN  PROCESS 

For 19 

Order  or 
Job  No. 

Description 
of  Work 

Date  of 
Order 

Accumulated 
Cost 

Total 

^= 

Form  92.    Statement  of  Obsolete  or  Slow-Moving  Orders  in  Process. 
(Size,  8x11.) 

and  records  still  show  that  they  form  part  of  the  work  in  proc- 
ess inventory.  If  the  attention  of  the  management  is  drawn 
to  these  items  by  means  of  a  regular  report  they  may  be  in- 
vestigated, and,  if  advisable,  their  cost  written  off  the  books. 

Statement  of  Factory  Expenses 

The  form  of  the  statement  of  factory  expense  will  depend 
to  some  extent  upon  the  method  of  overhead  distribution  in 
use.  The  report  may  be  arranged  to  show  the  indirect  ex- 
penses applicable  to  each  department,  or  separate  departmental 
reports  may  be  rendered.  If  the  rates  are  fixed  in  advance, 
these  should  be  compared  with  the  actual  rates  for  the  period. 
This  information,  which  may  be  entered  upon  a  form  similar  to 


FINANCIAL  AND  FACTORY  STATEMENTS 


371 


Form  93,  may  be  obtained  from  the  factory  expense  accounts. 
Any  unusual  increases  in  items  of  expenses  should  be  noted  for 
the  attention  of  the  management. 


THE  BROWN  MANUFACTURING  CO. 
New  York,  N.  Y. 

STATEMENT  OF  FACTORY  EXPENSES 

DEPARTME^rr 

For 19 

Details 

Current 
Period 

Previous 
Period 

Increase  or 
Decrease 

Supervision 

Clerks*  Salaries 

Indirect  Labor 

Repairs 

Depreciation 

Insurance — Fire 

Insurance — Liability 

Rent        

Taxes 

Supplies 

Experimental  Work 

Defective  Work 

Light  and  Heat 

Power      

Sundries    

General  Operating 

Totals       

COMPARISON  OF  OVERHEAD  RATES 

Established  Rates 

Actual  per  Above  Expenses 

Form  93.    Statement  of  Factory  Expenses.    (Size,  8  x  n.) 

Statement  of  Machine  Statistics 

If  the  machine  rate  method  of  overhead  distribution  is  in 
use,  the  report  should  show  the  items  chargeable  to  each  ma- 


372 


CONTROLLING  THE  COST  RECORDS 


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chine;  and  the  report  may  cover  the  entire  plant,  or  separate 
reports  may  be  rendered  for  each  machine.     The  form  may 
be  elaborated  for  comparing  the  current  machine  rates  with 
•those  for  the  previous  period,  or  with  the  standard  rates. 

Machine  statistics  dealing  with  the  repairs  and  mainte- 
nance charges  on  particular  machines  may  also  be  prepared 
separately  and  submitted  on  a  form  similar  to  Form  94,  and 
may  be  combined  with  the  expense  report  described  above.  The 
most  important  feature  of  this  report  is  the  number  of  operat- 
ing hours,  commonly  termed  "running  time,"  as  it  enables  com- 
parisons to  be  made  with  the  standard  time  or  previous  records. 

Summary  of  Financial  and  Factory  Statements 

The  financial  and  factory  statements  which  cover  the 
operation  of  a  complete  cost  system  are  shown  on  Form  95. 

Method  of  Presenting  Statements 

All  information  contained  in  the  reports  described  in  this 
chapter  may  be  obtained  from  the  accounts,  trial  balances,  and 
cost  summaries  without  the  necessity  of  closing  the  accounts. 
After  the  books  of  original  entry  are  closed  for  the  period,  and 
current  transactions  are  posted  to  the  general  and  factory 
ledgers  preparatory  to  taking  a  trial  balance,  the  trial  balance 
figures  should  be  in  agreement  with  those  of  the  supporting 
subsidiary  records.  The  reports  may  then  be  prepared  for  the 
period  under  review. 

Reports  should  be  submitted  regularly  and  should  be  pre- 
sented as  promptly  as  possible.  To  be  of  value  they  must  be 
up  to  date. 

The  style  of  the  form  used  will  obviously  depend  upon  the 
information  which  is  desired,  the  governing  conditions  being 
the  needs  of  the  executive.  As  he  is  not  a  trained  bookkeeper 
or  accountant,  the  forms  should  be  presented  in  the  simplest 
possible  way.     Some  executives  prefer  all  facts  and  figures  to 


374 


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FINANCIAL-  AND  FACTORY  STATEMENTS  375 

be  entered  upon  one  large  sheet.  This  often  leads  to  the  use 
of  a  cumbersome  sheet  which  is  so  elaborate  that  the  informa- 
tion shown  can  be  grasped  only  by  one  thoroughly  familiar 
with  the  detail. 

While  reports  usually  cover  past  performances,  they  also 
serNTe  as  a  basis  for  future  action.  Unless  the  information 
shown  upon  them  is  actually  being  used  or  means  something 
to  the  executive  to  whom  it  is  submitted,  it  is  worthless.  Con- 
siderable time  is  often  wasted  in  the  preparation  of  elaborate 
statements  which  are  of  little,  if  any,  value  to  the  man  for 
whom  they  are  prepared.  To  sum  up,  reports  are  compiled 
to  be  studied  by  executives  and  department  heads  with  the  ob- 
ject of  remedying  defects  or  improving  existing  conditions. 

Disposition  of  Statements 

Reports  accumulate  very  rapidly  and  ample  provision 
should  be  made  for  a  ready  reference  to  them  if  they  are  to  be 
of  any  value  as  a  means  of  making  comparisons.  Cumber- 
some sheets  are  apt  to  be  folded  and  inserted  in  desk  pigeon- 
holes or  drawers,  and,  when  it  is  desired  to  refer  to  old  reports, 
time  is  wasted  because  the  information  cannot  be  obtained 
readily.  Therefore,  in  designing  the  forms  it  is  well  to  con- 
sider the  use  of  a  standard  size  sheet  for  all  reports.  This  will 
permit  their  being  filed  in  a  loose-leaf  binder  indexed  by  means 
of  tabs  used  to  mark  the  different  kinds  of  reports. 

The  practice  of  binding  all  reports  together  for  one  defi- 
nite period  often  leads  to  confusion  when  comparisons  are  de- 
sired. A  better  practice  is  to  combine  those  of  like  character, 
when  they  may  not  only  be  compared  readily,  but  also  quick 
reference  may  be  made  to  a  particul  r  report  of  any  period. 

Style  and  Ruling  of  Reports 

Specially  ruled  reports  which  are  prepared  to  meet  the 
requirements  of  a  particular  industry  are  expensive.     Ofteo 


376  CONTROLLING  THE   COST   RECORDS 

large  numbers  of  forms  are  printed;  conditions  then  change 
and  the  stationery  has  to  be  scrapped.  As  generally  only  one 
report  form  a  month  is  used,  it  will  be  seen  that  to  print  any 
quantity  is  not  economical.  Therefore,  in  most  instances  the 
reports  may  be  typed  or  prepared  with  pen  and  ink  upon 
standard-ruled  sheets.  Different  styles  of  ruling  often  answer 
the  needs  of  several  reports. 

Interlocking  and  Agreeing  Reports 

The  information  shown  upon  two  or  more  reports  may 
often  be  combined  into  one,  while  some  reports  may  be  elimi- 
nated if  they  fail  to  fill  a  need.  Wherever  the  figures  in  one 
report  are  the  same  as  those  in  another,  they  should  be  com- 
pared to  see  that  the  results  and  financial  facts  interlock  or  are 
in  agreement.  Under  some  circumstances  cost  summaries 
may  be  designed  to  serve  as  reports  to  the  management. 

Time  of  Presenting  Reports 

To  insure  the  attention  of  the  management  being  given 
to  the  reports,  it  is  well  to  have  regular  conferences,  at  which 
time  the  information  as  shown  thereon  may  be  discussed.  If 
this  is  impracticable,  the  report  should  provide  space  for  any 
remarks  as  to  special  items  which  it  contains,  or  the  remarks 
may  be  submitted  in  the  form  of  an  attached  communication. 

The  work  on  regular  reports  should  not  interfere  with  the 
preparation  of  special  reports  at  any  time  that  information  of 
a  special  character  is  desired.  A  cost  system  is  a  source  of 
detailed  information  to  which  the  management  should  have 
access.  As  it  is  impossible  for  executives  and  department 
heads  to  examine  the  accounts  and  records,  any  useful  in- 
formation should  be  submitted  in  report  form.  Too  often, 
information  is  submitted  in  verbal  form  which  should  be  em- 
bodied in  regular  written  reports. 


CHAPTER  XXII 

METHOD  OF  TAKING  INVENTORY 

Inventory  Methods 

Because  cost-finding  provides  for  the  keeping  of  a  per- 
petual inventory,  it  does  not  necessarily  follow  that  the  taking 
of  physical  inventories  is  entirely  eliminated.  Physical  inven- 
tories must  be  taken  at  regular  intervals  and  the  cost  accounts 
verified  with  actual  facts,  as  shown  by  an  actual  count  of  the 
items  of  stock  on  hand  in  the  raw  material,  finished  parts,  and 
finished  stock  storerooms  as  well  as  the  work  in  process  in  the 
operating  departments.  This  verification  is  necessary  to  ascer- 
tain discrepancies  as  soon  as  they  arise. 

Even  where  an  up-to-date  cost  system  is  in  use,  adjust- 
ments in  the  valuation  of  inventory  items  have  to  be  made  from 
time  to  time.  For  example,  certain  items  may  become  obso- 
lete, or  market  conditions  both  as  to  the  purchase  of  materials 
and  the  sale  of  finished  product  may  change,  making  it  neces- 
sary to  adjust  the  valuations  of  certain  items  when  financial 
statements  are  prepared.  A  cost  system  does,  however, 
eliminate  the  necessity  for  taking  a  complete  physical  inven- 
tory in  a  limited  time  for  the  reason  that,  values  being  recorded 
in  the  books,  the  physical  count  and  check  may  be  done  grad- 
ually and  the  work  spread  over  the  year.  This  method  is  used 
when  the  records  of  the  cost  system  are  reliable  and  form  a 
basis  for  a  physical  inventory.  When  no  cost  system  is  in 
operation  and  when  it  is  desired  to  ascertain  the  financial  con- 
dition of  the  concern,  an  actual  physical  count  of  all  items 
composing  the  merchandise  inventory  must  be  made  at  a  defi- 
nite time. 

377 


378  CONTROLLING  THE  COST  RECORDS 

Testing  the  Inventory 

When  different  portions  of  the  merchandise  inventory  are 
tested  at  different  times  during  the  year,  it  is  often  practicable 
to  have  a  fixed  schedule  showing  what  items  should  be  tested 
and  the  dates  when  the  tests  should  be  made.  A  simple  inven- 
tory test  form  is  given  in  Form  21,  page  93.  This  form  is 
intended  for  testing  the  correctness  of  the  entries  in  the  de- 
tailed stores  ledger  accounts,  finished  parts,  and  finished  stock 
accounts.  It  may  provide  for  a  test  as  to  quantities  only  or 
for  valuations  as  well. 

The  information  as  to  the  actual  amounts  and  quantities 
should  be  shown  on  the  form  and  these  amounts  should  be 
compared  with  the  balances  of  the  ledger  accounts.  Any 
differences  should  be  investigated,  as  it  may  be  found  that  vari- 
ous charges  and  credits  have  been  posted  to  the  wrong  stores 
ledger  accounts.  These  clerical  errors  should  be  adjusted  and 
the  inventory  discrepancies  eliminated.  When  after  thorough 
investigation  the  differences  cannot  be  located,  provision  should 
be  made  for  charging  the  items  to  an  Inventory  Adjustment 
account  on  the  general  ledger.  This  will  guard  against  the 
"covering  up"  of  this  information. 

Inventory  Adjustments 

Inventory  adjustments  should  not  be  absorbed  in  the 
factory  overhead  without  calling  the  attention  of  the  manage- 
ment to  their  necessity.  If  a  record  of  these  items  is  estab- 
lished, comparisons  may  then  be  made  with  future  periods 
until  they  finally  reach  a  minimum.  Under  certain  conditions 
these  adjustments  may  need  to  be  made  because  of  thefts, 
short-weights,  or  intentional  tampering  with  the  stock.  In 
such  cases,  the  loss  should  not  be  absorbed  in  the  factory  over- 
head but  should  be  charged  as  a  special  deduction  to  profit  and 
loss. 

In  many  businesses,  it  is  the  practice  to  give  stock  away  as 


METHOD   OF  TAKING   INVENTORY  379 

samples  or  for  other  purposes,  often  without  any  record  of 
their  disposal.  If  the  records  are  to  be  accurate,  the  cost  of 
such  gifts  should  be  charged  to  a  Sample  Expense  account 
and  included  among  the  selling  expenses.  Gifts  also  may  be 
a  selling  or  administrative  expense  charge  and  as  such  should 
be  deducted  from  the  factory  gross  profit.  The  value  of  free 
goods  is  often  not  realized  until  a  record  is  kept  of  their 
amount. 

Inventory  Sheet 

For  the  purpose  of  checking  the  controlling  inventory  ac- 
counts, the  information  shown  upon  the  detailed  inventory  test 
forms  may  be  summarized  upon  a  regular  inventory  sheet  such 
as  shown  in  Form  22,  page  94.  This  form  is  more  or  less 
standardized  and  is  sold  by  large  stationery  houses.  It  may 
be  used  for  summarizing  the  inventory  of  raw  materials  and 
supplies,  finished  parts,  and  finished  stock  items  when  actual 
physical  or  book  inventories  are  calculated. 

The  items  of  work  in  process  may  be  summarized  upon  a 
specially  ruled  inventory  sheet.  It  should  provide  columns 
for  details  as  to  the  material,  labor,  and  overhead  costs.  Form 
96  is  a  sample  sheet  for  this  purpose. 

Physical  Inventories 

Where  no  perpetual  inventory  is  kept,  a  physical  inventory 
should  be  taken  at  least  once  during  the  fiscal  year,  for  the 
purpose  of  ascertaining  the  financial  condition.  In  large 
manufacturing  plants  the  taking  of  a  physical  inventory  is 
often  a  burdensome  and  complicated  undertaking.  The  list- 
ing and  counting  of  the  items  composing  the  merchandise  on 
hand  is  usually  made  upon  inventory  sheets  similar  to  those 
of  Form  22  (page  94)  and  Form  96.  This  method  of  taking 
the  inventory  is,  however,  unsatisfactory  in  that  too  often  the 
work  is  done  hurriedly  and  in  haphazard  fashion. 


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METHOD   OF  TAKING   INVENTORY  381 

A  cost  system,  to  be  accurate,  must  be  based  on  the  facts 
shown  by  a  physical  merchandise  inventory.  Therefore  it  is 
most  essential  that  the  latter  should  be  complete  and  thorough. 
Many  systems  fail  because  of  an  inaccurate  inventory  used  as 
the  starting  point.  Discrepancies  then  appear  in  the  balances 
within  a  short  time,  and  in  explanation  of  these  discrepancies 
the  suggestion  is  made  that  they  are  perhaps  due  to  errors  in 
the  opening  inventory.  This  throws  the  whole  system  out  of 
gear  and  is  a  frequent  cause  of  discouragement  to  employees 
who  are  making  a  sincere  effort  to  keep  accurate  records. 

In  considering  the  taking  of  a  physical  inventory,  the 
following  points  should  be  noted: 

1.  Preparatory  work  for  the  inventory. 

2.  Instructions  to  be  issued. 

3.  Method  of  taking  the  inventory. 

4.  Method  of  listing  items. 

5.  Method  of  pricing  items. 

6.  Method  of  figuring  items. 

7.  Method  of  checking  the  inventory. 

8.  Method  of  proving  and  summarizing  the  inventory. 

Preparation  for  Physical  Inventory 

Some  time  before  the  date  for  taking  a  physical  inventory, 
instructions  should  be  issued  to  the  factory  foremen  and  fac- 
tory clerks  to  prepare  for  this  work,  which  will  be  done  during 
a  certain  period.  In  large  plants,  while  the  work  is  in  prog- 
ress, all  manufacturing  operations  should  cease,  as  it  is  im- 
possible to  make  an  accurate  count  of  items  while  the  plant 
is  in  operation.  In  smaller  plants  it  may  be  possible  to  take  a 
fairly  accurate  inventory  while  work  is  being  done,  but  these 
instances  are  few  and  accuracy  may  be  sacrificed  for  the  sake 
of  speed. 

The  preparatory  work  consists  of  cleaning  up  the  stock- 
rooms and  operating  departments  to  see  that  all  items  are 


382  CONTROLLING  THE   COST   RECORDS 

stacked  in  an  orderly  manner.  Raw  materials  which  are 
found  on  workmen's  benches  or  which  are  in  the  operating  de- 
partments should  be  sent  to  the  stock-rooms  to  be  placed  in  the 
proper  bins,  drawer^,  or  racks.  Material  of  like  character 
should  be  grouped  or  stacked  in  some  definite  arrangement  so 
as  to  enable  a  rapid  count  to  be  made.  Material  hidden  away 
in  corners  or  "nooks"  of  the  storerooms  and  departments 
should  be  brought  out  where  it  will  receive  attention.  Ob- 
solete items  or  materials  which  are  slow-moving  should  be 
stacked  separately. 

Special  orders,  standard  product  orders,  repair  orders, 
and  construction  orders  which  are  in  process  in  the  operating 
departments  should  be  kept  in  distinctive  piles.  The  work  in 
process  is  often  difficult  to  describe  in  the  inventory,  and  there- 
fore all  items  that  can  possibly  be  transferred  to  stock  or  reach 
a  definite  state  of  production  should  receive  attention  during 
the  period  when  the  preparatory  work  is  being  done.  Some 
of  this  preparatory  work  can  be  handled  only  when  the  plant 
is  shut  down,  but  a  large  part  of  it  may  be  done  beforehand. 

Department  foremen  sometimes  try  to  rush  the  current 
work  through  and  transfer  it  to  subsequent  operating  depart- 
ments so  that  they  will  have  little  to  do  when  the  time  comes 
to  take  the  inventory.  As  this  practice  may  disorganize  pro- 
duction, it  should  be  discouraged. 

Instructions  as  to  the  Taking  of  the  Inventory 

Instructions  as  to  the  method  of  taking  the  inventory 
should  be  given  to  the  employees  responsible  for  the  counting, 
entering,  checking,  listing,  pricing,  calculating,  summarizing, 
and  proving  of  the  items.  Instructions  should  be  plain  and 
should  specify  that  the  machinery,  tools,  and  miscellaneous 
equipments  are  not  to  be  included  in  the  inventory.  If  an  in- 
ventory of  these  items  is  desired,  it  should  be  taken  separately 
upon  records  prepared  especially  for  the  purpose. 


METHOD   OF  TAKING   INVENTORY  383 

The  instructions  should  be  typed  and  handed  to  the  clerks 
responsible  for  the  work  so  that  they  will  know  exactly  what 
to  do  and  the  manner  in  which  it  should  be  done.  This  in- 
formation should  cover  the  order  of  counting  and  entering  the 
items  and  the  description  to  be  entered  upon  the  inventory 
sheets  or  tags.  Any  instructions  covering  work  in  process 
should  be  explicit.  When  only  partial  information  is  sent  to 
the  office,  costs  cannot  be  properly  calculated  because  the  de- 
scription of  the  job  is  not  sufficient  to  identify  it. 

Method  of  Taking  the  Inventory 

The  method  of  taking  the  inventory  depends  to  some  ex- 
tent upon  the  lay-out  of  the  plant,  the  products  manufactured, 
and  the  existing  conditions  and  time  allotted  to  the  task. 
Rarely  is  sufficient  time  allowed  for  accurate  work,  the  tend- 
ency being  to  rush  it  through  as  one  of  the  burdens  and  "bug- 
bears" of  office  detail.  Therefore,  factory  employees  who 
may  be  delegated  to  this  important  task  do  not  realize  its 
bearing  on  the  financial  statements  prepared  at  the  end  of  the 
fiscal  period. 

If  possible,  the  work  should  be  done  by  men  who  are  ex- 
perienced in  clerical  detail  and  who  also  have  a  knowledge  of 
the  product,  operations,  and  processes.  Where  a  complete 
cost  system  is  in  use,  the  stock  and  factory  clerks  are  usually 
qualified  by  experience  and  clerical  training  to  take  a  complete 
physical  inventory.  The  work  should  be  supervised  by  a 
responsible  official,  such  as  the  factory  superintendent,  pro- 
duction manager,  head  cost  accountant,  purchasing  agent,  or 
head  stock  clerk,  who  know  the  value  and  realizes  the  impor- 
tance of  accuracy. 

In  large  plants  it  is  well  to  divide  the  supervision  so  that 
each  official  may  be  held  responsible  for  different  sections  of 
the  inventory.  For  example,  the  head  of  the  purchasing  de- 
partment, or  head  stock-room  clerk,  may  be  made  responsible 


384  CONTROLLING   THE   COST   RECORDS 

for  the  raw  material  items ;  the  factory  superintendent  or  pro- 
duction manager  may  be  responsible  for  the  finished  parts  and 
work  in  process  items;  the  head  clerk  of  the  finished  stock  de- 
partment, or  head  of  the  sales  department,  for  the  items  of 
finished  stock;  while  the  head  cost  accountant  or  clerk  in 
charge  of  the  cost  department  may  be  the  supervising  authority 
over  all,  to  whom  items  which  are  questionable  may  be  re- 
ferred. 

In  taking  inventory  the  old-fashioned  method  of  doing 
the  actual  listing  in  the  factory  is  found  to  be  impracticable  in 
large  plants  and  is  becoming  more  and  more  obsolete.  For 
one  reason,  items  are  often  overlooked,  and  for  another,  when 
the  men  listing  the  items  are  interrupted  the  tendency  is  to  for- 
get where  they  left  off.  As  the  articles  themselves  do  not 
show  any  mark,  it  is  often  impossible  to  tell  very  readily  which 
items  were  listed  and  which  were  not  listed. 

What  is  known  as  the  "Inventory  Tag  Method"  does 
away  with  the  drawbacks  mentioned,  and  for  this  reason  has 
become  more  or  less  the  standardized  method  in  most  manufac- 
turing and  mercantile  industries.  The  principle  of  this 
method  is  that  every  item  to  be  inventoried  must  be  tagged. 
The  tags  are  simple,  containing  the  information  shown  in 
Form  97. 

The  tags  should  be  numbered  in  advance  and  may  differ 
in  color  for  use  with  the  different  classifications  of  the  inven- 
tory. For  example,  white  tags  may  be  used  for  raw  mate- 
rial stock  items,  buff  for  finished  stock  items,  pink  for  finished 
parts  stock  items,  and  green  tags  for  work  in  process  items. 
Or,  again,  different  colored  tags  may  be  used  for  the  various 
stock-rooms  and  operating  departments.  Where  the  inven- 
tory is  not  a  large  one,  little  is  gained  by  the  use  of  different 
colors,  as  all  tags  are  numbered  in  advance. 

Definite  series  of  numbered  tags  should  be  given  to  the 
persons  who  are  to  enter  upon  them  the  description  of  mer- 


METHOD   OF  TAKING  INVENTORY. 


38s 


Form  97.    Inventory  Tag.     (Size,  3  x  4.) 


chandise  inventory,  and  these  should  be  receipted  for  and  a 
record  kept  at  the  office  as  to  the  person  responsible  for  each 
such  series.  The  quantity  of  tags  given  to  an  individual  will, 
of  course,  depend  upon  the  number  or  items  he  has  to  inven- 
tory, and  he  may  obtain  more  as  required  by  signing  for  their 
receipt. 

The  men  who  will  do  the  actual  counting  and  entering 
of  the  inventory  should  attach  these  tags  to  the  various  articles. 
All  items  of  stock  in  all  departments,  whether  finished  stock, 
finished  parts  stock,  or  work  in  process,  and  also  each  diflFerent 
kind  of  goods  composing  the  raw  material  inventory  should  be 
tagged  separately  in  order  to  arrive  at  the  quantity  on  hand 
of  each  particular  article  or  material. 

The  tags  may  be  attached  in  a  conspicuous  manner  to  a 
bin,  tray,  or  holder,  or  tied  to  an  article  which  forms  part  of  a 


386  CONTROLLING  THE   COST   RECORDS 

bundle  or  stack  of  material.  After  all  the  items  in  a  particular 
department  or  stock-room  have  been  tagged  and  the  entries 
made,  the  inspectors  should  test  some  of  the  items.  Under 
some  conditions,  it  may  be  necessary  to  recheck  and  verify  the 
entries  on  the  tags  of  every  detailed  item.  This  is  especially 
true  where  the  business  is  being  terminated  by  reason  of  a 
sale  or  liquidation. 

After  the  inspectors  are  satisfied  that  all  items  have  been 
properly  counted  within  a  particular  department,  the  tags  may 
be  removed  from  the  stacks  of  articles,  after  which  operations 
may  be  resumed,  provided  these  do  not  interfere  with  the 
inventory  work  of  any  other  stock-room  or  department. 

After  the  tags  are  collected,  they  should  be  arranged  in 
serial  number  to  see  that  none  are  missing.  If  any  disappear, 
an  inventory  may  be  incomplete  as  to  those  items,  but  with  a 
reasonable  amount  of  care  missing  tags  may  be  reduced  to  a 
minimum.  All  tags,  including  those  which  may  have  been 
voided,  should  be  returned  to  the  office,  and  after  all  have  been 
accounted  for,  the  inventory  may  be  listed. 

Method  of  Listing  the  Inventory 

Under  some  circumstances  the  tags  may  contain  prices 
and  total  costs  and  be  kept  as  a  permanent  inventory  record, 
the  listings  being  done  upon  adding  machine  slips.  In  other 
cases,  it  is  well  to  provide  for  a  complete  listing  of  the  inven- 
tory upon  forms  similar  to  Forms  22  (page  94)  and  96. 

In  listing  the  items  care  should  be  taken  to  see  that  the 
description,  quantity,  and  other  reference  marks  are  properly 
recorded  upon  the  inventory  sheets.  It  is  often  well  for  an- 
other set  of  clerks  to  call  off  the  details  from  the  tags  and 
verify  the  information  on  the  sheets.  Items  of  the  same  kind 
should  be  grouped  together  on  separate  inventory  sheets. 

The  items  of  raw  material,  work  in  process,  finished  parts 


METHOD   OF  TAKING   INVENTORY  387 

Stock,  and  finished  stock  should  all  be  listed  separately  so  that 
a  total  may  be  ascertained  for  each  of  these  classifications. 
Where  there  are  different  kinds  of  raw  material  classifications, 
each  class  should  be  listed  separately,  also  the  work  in  process 
for  each  operating  department. 

In  large  plants  the  listing  may  be  simplified  and  con- 
siderable time  saved  by  using  tabulating  machines,  which  sort, 
group,  and  total  the  information  upon  perforated  tags. 

Method  of  Pricing  the  Inventory 

The  pricing  of  a  merchandise  inventory  is  often  compli- 
cated by  market  conditions  and  also  by  the  purposes  for  which 
the  inventory  is  to  be  used.  For  example,  if  a  complete  inven- 
tory is  taken  for  the  purpose  of  proving  the  workings  of  a 
cost  system,  it  may  be  necessary  to  price  the  items  at  values 
shown  by  the  various  cost  records.  If  it  is  necessary  to  show 
a  conservative  valuation  at  market  or  cost,  whichever  is  lower, 
two  pricings  may  have  to  be  made,  one  to  prove  the  results 
of  the  cost  system  and  another  to  obtain  a  statement  of  financial 
condition  and  establish  a  conservative  basis  for  the  opening 
inventory  of  the  next  period. 

No  inventory  valuations  made  expressly  for  the  purpose 
of  proving  a  cost  system  should  be  carried  upon  the  records. 
Values  must  at  all  times  be  accurately  stated.  If  prices  of 
material  and  labor  decline,  it  is  essential  to  consider  the  effect 
of  this  drop  on  inventory  values  regardless  of  any  proof  of 
the  cost  system.  Financial  statements  should  be  based  upon 
facts  as  nearly  as  it  is  possible  to  ascertain  them.  Therefore, 
inventory  valuations  must  be  stated  conservatively  when  finan- 
cial statements  are  prepared.  It  is  advisable  for  a  separate  set 
of  clerks  to  check  the  inventory  prices.  Failing  this,  at  least 
some  person  in  authority  who  has  a  definite  knowledge  of  the 
product  should  review  and  OK  the  prices,  questioning  for  the 
purpose  of  investigation  all  items  which  are  doubtful. 


388  CONTROLLING  THE   COST   RECORDS 

Pricing  Raw  Material 

The  information  for  pricing  the  raw  material  items  may 
be  obtained  from  either  the  raw  stock  records,  purchase  depart- 
ment price  records,  or  market  quotations,  depending  upon 
which  is  available.  If  the  cost  values  as  shown  by  the  raw 
material  stock  records  are  lower  than  the  market  quotations, 
either  the  average  cost  or  the  last  cost  may  be  used  for  pricing 
the  raw  material  items.  In  any  event,  as  already  emphasized, 
the  cost  values  should  be  stated  conservatively  and  if  a  cost 
value  is  used,  it  should  always  be  lower  than  the  market  value. 

Pricing  Work  in  Process 

The  work  in  process  inventory  items  are  the  ones  that 
are  most  difficult  to  value  when  complete  costs  are  lacking. 
Often  these  items  are  priced  at  the  best  guess  obtained  from 
the  estimating  cost  clerk,  sales  department,  purchase  depart- 
ment, or  factory  foremen.  Where  a  cost  system  is  in  opera- 
tion, the  cost  records  should  be  used  as  a  basis  for  valuing  the 
work  in  process  inventory.  Under  the  order  method  of  cost- 
finding,  as  all  work  is  done  upon  some  definite  order  number, 
work  in  process  items  may  be  connected  with  the  particular 
cost  sheet  of  that  order.  All  information  as  to  costs  would 
then  be  obtained  from  the  cost  sheets.  Where  the  process 
method  of  cost-finding  is  in  use,  the  prices  are  obtained  from 
the  average  costs,  as  shown  by  the  detailed  cost  records  of  the 
various  processes.  It  is  therefore  important  to  consider  the 
exact  state  of  all  items  composing  the  merchandise  inventory, 
and  in  entering  these  items  the  last  operation  or  process  which 
they  have  undergone  should  be  stated. 

The  prices  for  inventorying  the  work  in  process  are  often 
based  upon  a  standard  or  predetermined  cost  which  may  be 
inaccurate.  Where  the  labor  costs  are  standardized,  only  fluc- 
tuations in  the  material  need  be  considered.  The  fluctuations 
are  so  important  that  information  as  to  these  costs  should  be 


METHOD   OF  TAKING  INVENTORY  389 

obtained   from  purchase   department  records   or   raw   stock 
records  if  complete  records  of  prices  are  kept  thereon. 

As  costs  consist  of  material,  labor,  and  overhead,  the 
valuations  placed  upon  work-in-process  inventory  items  must 
also  consist  of  these  three  elements  of  cost.  For  example,  if 
a  large  contract  were  three-quarters  completed,  the  costs  of 
that  job  would  not  consist  of  material  and  labor  alone.  Three- 
quarters  of  the  overhead  also  would  have  accumulated  and 
should  be  included  in  the  inventory  value  of  the  work  in 
process. 

Pricing  Finished  Parts  and  Finished  Stock  Items 

The  method  of  pricing  the  finished  parts  stock  and  fin- 
ished stock  items  should  also  be  considered.  Where  complete 
costs  are  kept,  the  prices  for  these  items  may  be  obtained  from 
the  various  stock  records  which  would  show  average  costs  to 
date.  In  some  cases  where  the  stock  records  do  not  show 
costs,  the  information  for  pricing  the  finished  stock  and  fin- 
ished parts  stock  items  would  be  obtained  from  the  cost  sheets 
or  other  cost  records.  Where  no  cost  system  is  in  operation, 
the  costs  of  finished  parts  or  finished  stock  are  obtained  from 
predetermined  or  estimating  cost  records.  Too  often  these 
items  are  guesses  which  cannot  be  verified  and  proved  with 
actual  facts. 

Whenever  finished  stock  and  finished  parts  stock  items  are 
priced,  consideration  must  be  given  to  possible  fluctuations  in 
material  and  labor  costs,  while  the  overhead  should  be  con- 
servatively computed. 

Figuring,  Checking,  and  Proving  the  Inventory 

In  taking  inventory  the  figuring  work  consists  principally 
of  multiplications  and  additions,  and  in  calculating  quantities 
and  prices  care  should  be  exercised  not  to  confuse  unit  prices 
with  prices  per  dozen,  per  gross,  or  whatever  the  quantity  may 


3$d  Controlling  the  cost  records 

be.  The  various  calculating  devices,  such  as  adding  and  multi- 
plying machines,  are  of  great  assistance.  Also,  some  concerns 
are  organized  for  the  express  purpose  of  calculating  inven- 
tories for  manufacturers  and  mercantile  businesses.  As  the 
taking  of  an  inventory  entails  much  additional  work,  and  as 
these  concerns  place  a  corps  of  clerks  at  the  disposal  of  the 
business  which  utilizes  their  services,  it  is  often  advisable  to 
engage  temporary  help  of  this  character  so  as  to  eliminate 
much  of  the  drudgery  and  overtime  usually  necessary. 

Where  the  pricing  and  calculating  is  done  directly  upon 
inventory  sheets  (Form  22,  page  94,  and  Form  96,  page  380), 
all  multiplications  and  additions  should  be  recalculated.  Even 
this,  however,  does  not  insure  accuracy,  as  the  same  errors 
may  be  made  by  different  clerks.  Therefore,  as  a  further  safe- 
guard, prices  and  total  amounts  may  also  appear  upon  the 
inventory  tags  (Form  97).  The  comparison  of  one  amount 
with  the  other  insures  accuracy.  Another  method  is  to  have 
two  clerks  price  the  inventory  without  seeing  each  other's 
figures.  To  this  end  two  columns  are  ruled  on  the  inventory 
sheet.  After  the  first  calculations  are  made,  one  column  is 
detached  and  later  compared  with  the  second  set  of  figures 
entered  in  the  second  column.  If  the  totals  agree,  the  calcula- 
tions may  be  taken  as  accurate. 

Where  a  cost  system  is  in  operation,  the  merchandise  in- 
ventory may  be  proved  with  the  controlling  accounts  and  sub- 
sidiary ledgers.  As  the  sections  of  the  merchandise  inventory 
show  the  total  values  of  raw  material,  work  in  process,  finished 
parts  stock,  and  finished  stock,  these  totals  may  be  compared 
with  the  respective  controlling  accounts.  If  the  latter,  as 
already  explained,  are  subdivided,  a  proof  may  be  made  with 
each  classification  of  the  material,  work  in  process,  finished 
parts  stock  and  finished  stock.  In  the  same  way  the  material, 
labor,  and  overhead  costs  of  the  work  in  process  may  be  proved 
by  means  of  separate  controlling  accounts. 


CHAPTER  XXIII 

PLANT  ASSET  RECORDS 

Nature  and  Valuation  of  Plant  Assets 

In  a  well-planned  cost  system  it  has  been  seen  that  the 
cost  accounts  show  a  comprehensive  analysis  of  the  items  com- 
posing the  merchandise  inventory.  A  corresponding  amount 
of  attention  should  be  given  to  the  items  composing  the  plant 
assets,  which  include  assets  of  a  fixed  character  such  as  land, 
buildings,  and  machinery,  or  those  of  a  more  or  less  portable 
character  such  as  small  equipment  and  tools.  All  of  these 
items  are  subject  to  change  in  character  and  construction  and 
some  of  them  may  be  transferred  to  different  parts  of  the 
plant,  while  some  are  of  a  perishable  nature  and  should  be  con- 
sidered separately. 

When  complete  records  have  not  been  kept  which  balance 
with  the  accounts,  it  is  necessary  to  obtain  a  valuation  of  the 
asssets  by  means  of  an  appraisal.  As  a  rule  an  appraisal  shows 
the  sound  or  depreciated  values  and  reproduction  values,  and 
if  carefully  made  may  serve  as  a  basis  for  the  proper  deprecia- 
tion charges. 

The  various  items  composing  the  plant  assets  should  be 
specified  by  definite  names  and  symbol  numbers.  In  some 
instances  it  is  well  to  paint  the  numbers  on  the  machines,  fix- 
tures, and  miscellaneous  equipment,  or  a  metal  tag  bearing 
the  symbol  number  may  be  attached  to  each  piece  of  equipment. 

Plant  Asset  Record 

The  records  which  support  the  asset  items  may  take  the 
form  of  either  loose-leaf  sheets  or  cards.  Like  other  ledger 
records,  they  constitute  a  subsidiary  ledger,  the  balances  of 

391 


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CONTROLLING  THE  COST  RECORDS 


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CONTROLLING  THE   COST   RECORDS 


which  should  be  in  agreement  with  the  various  controlling  ac- 
counts kept  upon  the  general  or  private  ledger.  The  method  of 
filing  the  sheets  or  cards  would  depend  upon  the  classification  of 
the  equipment  and  the  system  of  symbols  in  use.  If  numbers 
are  used  as  symbols,  different  series  may  denote  particular 
types  of  machines  in  particular  departments.  These  records 
are  illustrated  in  Form  98,  which  shows  the  cost  value  in  each 
case  and  provides  spaces  for  recording  the  date  of  acquisition 
and  the  number  and  description  of  each  machine.  The  back 
of  the  record  may  be  ruled  to  provide  information  as  to  the 
repair  and  maintenance  charges  of  each  machine. 

Purposes  of  Plant  Record 

A  comprehensive  plant  asset  record,  when  properly  con- 
trolled, serves  the  following  purposes : 

1.  It  shows  the  valuation  of  each  asset,  the  detailed 

items  of  which  are  controlled  by  the  various  ac- 
counts in  the  general  or  private  ledger. 

2.  It  provides  a  comprehensive  basis  for  ascertaining 

depreciation  rates  applicable  to  definite  cost  pe- 
riods. 

3.  It  is  valuable  as  an  insurance  record  for  judging 

the  amount  of  insurance  which  it  is  necessary  to 
carry,  and  for  the  purpose  of  settling  disputes  in 
case  of  fire  losses. 

4.  It  provides  a  system  of  recording  the  information 

as  to  the  repairs  and  maintenance  charges. 

5.  It  serves  as  a  basis  for  judging  the  efficiency  of  a 

particular  machine  when  used  in  connection  with 
production  reports  for  a  definite  period. 

Machines 

Machines  may  be  purchased,  or  may  be  constructed  at  the 
plant.  If  purchased  they  should  be  valued  at  the  total  cost  to 
deliver,  which  includes  freight  and  cartage  inward.    This  cost 


PLANT  ASSET  RECORDS  395 

may  be  supplemented  by  the  cost  of  installing  the  machine 
ready  for  operation. 

When  a  machine  is  constructed  in  the  plant,  the  ques- 
tion often  arises  as  to  the  correct  method  of  estimating  its 
value.  The  construction  of  special  machinery  often  entails  a 
large  amount  of  experimental  work,  and  this  obviously  forms 
part  of  its  cost.  While  no  item  of  equipment  should  ever  be 
overvalued,  yet  the  full  time  and  material  consumed  in  its 
manufacture,  as  well  as  overhead,  should  all  be  considered. 
Often  the  item  of  overhead  is  ignored  in  a  desire  to  state  the 
value  of  expensive  machinery  or  equipment  conservatively.  As 
costs  consist  of  material,  labor,  and  overhead,  machinery  con- 
structed at  the  plant  should  be  charged  with  these  three  ele- 
ments. 

If  the  construction  cost  of  a  machine  proves  to  be  ex- 
cessive and  it  is  found  that  it  could  be  purchased  in  the  open 
mai  ket  at  a  much  lower  price,  it  should  not  be  included  among 
the  fixed  assets  at  this  excessive  value.  While  this  v/ould  be 
the  true  cost  of  the  machine,  a  correct  and  conservative  policy 
of  valuation  never  includes  exaggerated  asset  values.  For 
example,  in  order  to  find  work  for  the  employees  of  a  wood- 
working plant,  some  desks  were  constructed  during  a  slack 
period,  the  costs  on  which  proved  to  be  in  excess  of  the  price 
for  which  the  desks  could  be  purchased  in  the  open  market. 
When  the  costs  of  these  desks  were  ascertained,  a  portion 
of  these  costs  should  have  been  charged  as  a  profit  and  loss 
deduction  so  that  the  true  value  of  the  desks,  included  in  the 
assets  accounts,  would  not  have  been  overstated.  . 

The  expense  of  installing  machines  often  constitutes  an 
important  item  of  their  cost  for  the  reason  that  special  plat- 
forms or  foundations  may  have  to  be  built  before  the  machin- 
ery is  ready  for  operation.  Installation  costs,  therefore,  form 
part  of  the  cost  of  the  equipment  installed. 

When  machines  are  transferred  from  one  department  to 


396  CONTROLLING  THE   COST   RECORDS 

another,  values  are  often  destroyed  in  one  place  which  are 
more  than  offset  by  the  new  value  added  to  the  machine  set 
up  in  another  place.  For  example,  the  old  foundation  or  plat- 
form in  the  one  place  may  be  destroyed,  whereas  the  platform 
used  for  installing  the  machine  in  its  new  location  may  cost 
considerably  more  than  the  one  destroyed. 

To  provide  for  a  proper  accounting  of  such  a  transfer,  it 
is  necessary  to  deduct  the  value  destroyed  and  set  up  among  the 
assets  the  new  cost  of  installing  the  machine  in  the  new  loca- 
tion. This  is  often  a  difficult  accounting  problem  when  a  whole 
department  is  transferred  and  the  removal  is  covered  by  one 
factory  order.  If  the  costs  incidental  to  moving  and  those  re- 
lating to  the  new  construction  and  equipment  are  combined  or 
compiled  together,  no  basis  exists  for  analyzing  the  costs  so 
that  the  expense  accounts  may  be  properly  charged  and  the 
asset  accounts  conservatively  set  up.  Therefore,  wherever 
possible,  a  separate  order  should  cover  the  transfer  of  each 
machine  so  that  the  costs  in  each  case  may  be  kept  separate, 
thus  furnishing  the  basis  for  a  complete  system  of  plant  asset 
records. 

Tools 

Tools  considered  as  plant  assets  include  large,  special, 
and  small  tools,  excepting  those  which  are  perishable  in  char- 
acter. Special  tools  made  for  the  needs  of  a  plant  should  be 
closely  guarded  by  complete  records.  Small  manufacturing 
concerns  have  been  known  to  be  wrecked  by  the  theft  of  their 
special  tools. 

A  tool  room  is  often  the  most  important  stock-room  of  a 
mechanical  plant,  and  therefore  the  necessary  records  should 
be  kept  to  watch  closely  the  tools  used  in  the  operating  de- 
partments. A  simple  method  applicable  to  small  tools  is  to 
place  them  in  numbered  racks  or  hang  them  on  numbered 
hooks.     When  an  employee  requires  a  tool,  a  receipt  should 


PLANT  ASSET  RECORDS  397 

be  obtained.  This  receipt  usually  takes  the  form  of  the  em- 
ployee's tag  number,  which  is  hung  upon  the  hook  or  rack 
from  which  the  tool  was  taken.  When  the  tool  is  handed  in  by 
the  employee  responsible  for  its  return,  his  metal  tag  is  handed 
back  to  him.  Like  all  other  stock-rooms,  the  tool  room  should 
be  under  lock  and  key  and  in  charge  of  a  special  clerk  who 
should  be  held  responsible  for  its  orderly  maintenance  and  for 
all  items  lost. 

As  it  is  impracticable  to  keep  an  elaborate  detailed  record 
of  the  miscellaneous  small  tools,  these  items  may  be  grouped 
and  recorded  upon  loose-leaf  sheets  or  cards  and  controlled 
separately  by  a  general  or  private  ledger  account.  Large  tools 
and  all  tools  of  special  character  should  be  recorded  upon 
separate  records  similar  to  Form  98,  these  containing  a  com- 
plete description  of  each  tool,  covering  its  cost,  repair,  and 
depreciation  rate.  Large  and  special  tools  should  be  treated 
in  the  same  manner  as  machines  and  other  large  items  of 
equipment. 

Fixtures 

Plant  fixtures,  which  consist  of  the  benches,  desks,  racks, 
bins,  etc.,  should  be  controlled  separately  and  should  be  desig- 
nated by  symbols.  The  information  as  to  their  cost  should 
be  recorded  upon  plant  asset  records,  giving  a  complete  de- 
scription of  each  article. 

Machine  Parts 

Miscellaneous  large  machine  parts  are  often  included  as 
a  portion  of  the  cost  of  the  machine  to  which  they  belong. 
Where  this  is  not  done,  a  separate  plant  asset  record  should 
be  allotted  to  each  machine  part  similar  to  the  forms  used  for 
tools  and  machines.  Otherwise,  if  these  parts  are  not  kept 
track  of,  production  may  be  interfered  with  by  their  loss 
when  required  for  use. 


398  CONTROLLING  THE   COST   RECORDS 

Dies,  Molds,  Etc. 

In  many  industries,  dies,  molds,  flasks,  patterns,  and  the 
like,  form  an  important  part  of  the  plant  assets.  Many  of 
these  items  are  made  or  purchased  for  the  requirements  of 
special  orders,  and  in  consequence  are  often  charged  directly 
to  the  cost  of  the  particular  job  on  which  they  are  used.  When 
this  is  not  practicable,  their  cost  should  be  absorbed  in  the 
overhead  by  means  of  depreciation  rates. 

Plant  asset  records  should  cover  the  various  classifica- 
tions of  these  items  so  that  depreciation  rates  may  be  estab- 
lished and  insurance  provided  for.  When  these  items  depre- 
ciate rapidly,  they  should  always  be  conservatively  valued 
in  the  financial  statements. 

Records  by  Appraisal  Companies 

Where  complete  plant  asset  records  are  lacking,  an  ap- 
praisal is  usually  made  at  irregular  intervals  as  a  means  of 
checking  or  adjusting  the  values  as  shown  upon  the  ledger 
accounts.  The  first  appraisal  may  be  used  as  a  basis  for  open- 
ing the  plant  asset  accounts.  Any  important  changes  in  the 
nature  and  value  of  equipment  may  be  reported  to  the  ap- 
praisal committee,  and  in  that  manner  values  may  be  kept  up 
to  date. 

The  changes  in  the  value  of  equipment  may  be  shown  in 
statement  form  at  the  end  of  a  cost  period,  and  the  manage- 
ment can  then  decide  which  items  are  to  be  capitalized  and 
which  are  to  be  charged  ofif  against  the  current  operations  of 
the  business.  Often  it  will  be  found  that  additions  and  de- 
ductions from  the  established  valuations  are  more  closely  scru- 
tinized than  the  original  valuations  themselves.  Under  these 
circumstances  it  is  advisable  to  take  an  inventory  or  to  make 
an  appraisal  of  the  equipment  so  as  to  establish  a  basis  for  the 
proper  accounting  of  these  important  items. 


Part  V — The  Installation  of  a  Cost  System 


CHAPTER  XXIV 

GENERAL  CONSIDERATIONS 

The  Cast  Accountant 

Cost-finding  methods  are  becoming  more  and  more  stand- 
ardized as  is  indicated  by  the  fact  that  many  of  the  forms 
required  to  operate  cost  systems  are  sold  by  stationery  houses. 
Notwithstanding  the  simplification  resulting  from  this  stand- 
ardization, cost  accountants  will  always  be  in  demand  for  the 
reason  that  the  detailed  method  of  procedure  in  finding  costs 
differs  in  almost  every  industry  and  to  some  extent  in  almost 
every  plant  and  in  consequence  must  be  devised  and  installed 
by  a  competent  cost  accountant  thoroughly  familiar  with  the 
principles  of  cost-finding  and  the  methods  of  compiling  and 
summarizing  cost  data. 

Among  those  engaged  in  cost  accounting  work,  the  first 
is  the  cost  accountant  engaged  in  public  practice  whose  place 
in  the  commercial  world  is  well  established.  Such  an  ac- 
countant acts  as  an  independent  advisor.  His  knowledge  of 
the  subject  enables  him  to  adopt  a  well-defined  policy  and  lay 
out  general  plans  which  he  knows  will  achieve  the  required 
results  because  they  are  fundamentally  sound  and  correct  and 
are  backed  by  his  own  personal  experiences  in  the  practice  of 
cost  accounting.  As  his  work  to  a  large  extent  is  supervisory, 
the  details  of  the  system  may  be  satisfactorily  planned  by 
less  experienced  assistants  or  accountants  engaged  in  the  par- 
ticular industry.  The  professional  man  is  the  teacher  who 
lays  the  foundation  for  the  complete  system  and  procedure. 

399 


400     THE  INSTALLATION  OF  A  COST  SYSTEM 

The  professional  cost  accountant  may  be  engaged  for  the 
purpose  of  devising  and  instalhng  an  entirely  new  cost  system, 
or  he  may  be  consulted  as  to  the  necessity  of  making  certain 
changes  in  the  existing  cost  system.  In  either  case  his  work 
is  at  an  end  when  the  system,  finally  installed,  or  corrected, 
has  proved  to  be  fundamentally  sound  in  its  operation. 

The  second,  and  equally  important,  type  of  cost  account- 
ant is  the  man  who  is  employed  by  a  concern  as  a  permanent 
member  of  the  organization.  He  devotes  his  whole  time  and 
ability  to  the  cost  problems  of  his  concern  and  is  held  respon- 
sible for  the  successful  operation  of  the  cost  system  as  a  whole. 

Work  of  the  Cost  Accountant 

Most  of  the  large  enterprises  of  today  are  provided  with 
cost  systems.  These  enterprises  are,  however,  constantly 
growing  and  developing,  new  lines  of  merchandise  are  being 
added,  and  new  manufacturing  methods  installed.  This  means 
that  their  cost  systems  must  be  adapted  to  these  changing 
conditions.  New  methods  of  compiling  cost  may  need  to  be 
devised,  existing  methods  must  be  modified,  and  perhaps  me- 
chanical office  appliances  may  be  advantageously  used  to  elimi- 
nate detail  work  in  cost  compilations. 

The  cost  accountant  must  know  all  the  "best"  ways  of 
reaching  these  ends.  Therefore,  if  he  is  to  operate  the  cost 
system  successfully  he  should  understand  the  fundamental  prin- 
ciples of  cost-finding,  and  be  able  to  revise  and  remodel  his 
cost  system  when  changes  in  manufacturing  conditions  make 
such  alterations  necessary. 

Cost  Classification  of  Enterprises 

Most  writers  on  accounting  attempt  to  classify  the  vari- 
ous enterprises  from  an  accounting  standpoint,  and  some 
of  these  classifications  are  given  here.  The  enterprises  listed 
are  divided  into  two  groups,  the  first  containing  those  classes 


GENERAL  CONSIDERATIONS  40I 

to  which  cost  accounting  systems  are  not  applicable,  the  sec- 
ond covering  industries  in  which  cost  accounting  may  be  prof- 
itably employed.  The  first  group  includes  the  following  classes : 

1.  Financial 

2.  Insurance 

3.  Professional 

While  ordinarily  no  cost  systems  are  operated  in  connection 
with  any  of  these  enterprises,  it  is  true  that  some  dentists, 
doctors,  and  accountants  keep  cost  records  of  a  simple  kind. 
The  second  group  in  which  a  cost  system,  either  in  whole 
or  in  part,  may  enter  into  and  form  part  of  the  accounting 
methods  and  system  of  each  enterprise,  includes: 

1.  Trading  or  mercantile  businesses,  such  as  retail,  job- 

bing, and  wholesale  houses.  In  this  class  of  busi- 
ness, costs  are  ascertained  by  departments.  To 
do  this  it  is  necessary  to  keep  complete  stock 
records  showing  the  money  values  of  stock  on 
hand,  and  also  records  showing  the  cost  of  the 
sales.  This  gives  a  basis  for  preparing  periodical 
financial  statements  during  the  fiscal  year. 

2.  Manufacturing  industries,  such  as: 

(a)  Metal-working   plants 

(b)  Wood-working  plants 

(c)  Textile  plants 

(d)  Paper  mills 

(e)  Chemical    works 

(f)  Paint  and  varnish  plants 

(g)  Boot  and  shoe  factories 
(h)  Garment  factories 

(i)    Shipbuilding  plants 

(j)   Garages,  machine  shops,  and  repair  shops 

3.  Mining  industries,  such  as  coal,  copper,  silver,  and 

gold  mining. 


402     THE  INSTALLATION  OF  A  COST  SYSTEM 

4.  Public   utilities,   such   as   railways,   street   railroads, 

electric  light,  gas,  and  water  companies. 

5.  Governmental   systems,   which   include   the   national 

government,  and  the  various  state,  county,  and 
municipality  governments,  with  the  various  de- 
partments of  each,  such  as  the  water  supply  de- 
partment, police  department,  fire  department,  de^ 
partment  of  health,  street  cleaning  department,  etc. 

6.  Public  and  private  institutions,  such  as  colleges  and 

schools,  sanitariums,  asylums,  and  hospitals.  The 
management  of  these  institutions  usually  requires 
some  cost  information  to  present  to  the  board  of 
directors  or  trustees  as  a  gage  of  the  efficiency  of 
the  management. 

7.  Miscellaneous  enterprises,  such  as  clubs,  hotels,  res- 

taurants, building  and  trade  contracting,  breweries, 
real  estate,  and  land  development  companies. 

Internal  Problems  Affecting  Cost  Installations 

Often  the  conditions  existing  in  an  industry  have  an 
important  bearing  on  the  devising  and  installation  of  cost  sys- 
tems. Not  the  least  among  these  is  the  disposition  of  the 
manufacturer  himself  and  his  organization  towards  the  cost 
system.  It  is  absolutely  useless  to  try  to  devise  and  install  a 
cost  system  if  it  is  going  to  be  regarded  with  suspicion  and 
criticism  by  those  who  are  to  operate  and  use  it,  before  it 
has  had  a  chance  to  prove  its  worth.  To  get  the  best  results, 
the  co-operation  of  the  management  and  the  entire  organization 
is  needed.  One  of  the  reasons  for  the  failure  of  many  cost 
systems  is  due  to  the  lack  of  this  co-operation. 

To  avoid  executive  opposition,  before  devising  or  in- 
stalling a  cost  system  the  requirements  of  the  management 
should  be  ascertained,  and  their  desires  be  fulfilled  so  far  as 
possible. 


GENERAL  CONSIDERATIONS 


403 


Among  the  working  force  the  foremen  and  various  de- 
partment heads  are  often  the  most  persistent  objectors  to  a 
cost  system,  as  they  are  hkely  to  regard  its  installation  as  an 
invasion  of  their  territory.  They  are  right  to  the  extent  that 
the  system  provides  an  effective  means  of  checking  their  work 
and  measuring  their  efficiency  in  a  way  that  cannot  be  done 
by  personal  inspection. 

The  most  common  shortcomings  of  a  foreman  are  found 
in  his  failure  to  plan  ahead  properly  and  lay  out  work  for  the 
men  under  him,  and  the  time  and  labor  reports  will  often 
show  his  deficiencies  in  this  respect.  To  illustrate,  the  time 
clock  cards  may  show  that  the  men  were  present  900  hours 
during  a  week,  while  the  labor  reports,  which  show  the  time 
spent  on  productive  jobs,  record  but  800  hours  for  the  same 
week.  The  discrepancy  disclosed  by  this  cross-checking  of 
labor  records  is  up  to  the  foreman  to  explain.  The  objec- 
tions of  the  foremen  and  the  men  may  perhaps  be  overcome 
on  the  lines  of  the  general  basis  of  the  general  benefit  of  the 
system  and  its  absolute  fairness  to  them. 

At  times  the  accountant  or  accountants  employed  per- 
manently by  a  particular  industry  who  have  established  cost 
systems  in  their  plant,  feel  that  a  new  system,  or  suggested 
changes  in  a  system,  are  within  the  scope  of  their  individual 
work,  and  resent  any  suggestion  from  outside  professional 
accountants  which  they  themselves  have  not  already  consid- 
ered. Since  any  changes  in  the  cost  department  directly  af- 
fect the  work  of  the  cost  clerks  and  largely  depend  upon  their 
co-operation  for  success,  it  is  most  essential  to  secure  their 
good-will.  A  good  plan,  where  possible,  is  to  allow  the  cost 
clerks  to  suggest  methods  and  changes.  Credit  for  such  sug- 
gestions, given  where  due,  often  aids  materially  in  the  suc- 
cessful operation  of  a  cost  system. 

The  good-will  of  the  estimating  department  must  also  be 
secured,  if  possible.     A  cost  system,  if  it  operates  properly, 


404     THE  INSTALLATION  OF  A  COST  SYSTEM 

provides  an  effective  means  for  checking  up  the  work  of  this 
department.         , 

The  sales  department  may  object  to  the  installation  of  a 
cost  system  if  it  involves  changes  in  the  method  of  pricing. 
Old-fashioned  employees  cannot  get  used  to  a  new  method  of 
figuring  costs  as  a  basis  for  making  a  selhng  price.  Often 
it  will  be  advisable  to  allow  the  sales  department  to  figure  prices 
in  both  the  old  and  the  new  way  until  the  new  methods  prove 
their  greater  accuracy  and  value. 

Fitting  the  Cost  System  to  Existing  Conditions 

A  special  cost  clerk  is  desirable  when  a  cost  system  is  to 
be  installed.  If  the  work  is  to  be  undertaken  by  the  regular 
office  force  the  system  must  be  one  they  can  handle,  and  when 
the  clerical  force  lacks  experience  in  such  work,  this  necessi- 
tates a  very  simple  system.  More  will  be  accomplished  by 
generalizing  results  in  such  cases  than  by  putting  in  a  complete 
system,  which  is  bound  to  break  down  because  the  clerical  force 
cannot  handle  it.  In  other  words,  the  cost  accountant  must 
work  along  the  lines  of  least  resistance  and  begin  with  as 
simple  a  system  as  possible,  amplifying  this  and  adding  new 
features  as  the  conditions  allow. 

Under  such  conditions  it  may  be  wise  to  introduce  at 
first  an  "Estimating  System,"  which  is  one  of  the  simplest 
systems  but  one  which  will  serve  its  own  purpose  and  also  soon 
show  where  more  complete  methods  should  be  applied.  The 
size  of  the  plant  and  complexity  of  the  work  will,  of  course, 
have  some  influence  on  the  system,  both  in  the  beginning  and 
during  its  growth.  It  cannot  be  expected  that  an  elementary 
installation  will  give  satisfactory  results  where  there  are  many 
varieties  of  articles  manufactured,  or  where  the  processes  are 
numerous  or  involved. 

The  growth  of  a  system  is  not  necessarily  toward  com- 
plexity.    Very  often,  after  a  factory  is  well  organized  and 


GENERAL  CONSIDERATIONS  405 

the  efficiency  work  of  the  cost  system  is  beginning  to  show 
results,  features  that  were  at  first  treated  separately  may  be 
included  in  larger  units  and  much  detail  labor  avoided.  The 
system  at  first  must  fit  existing  conditions;  but  one  of  the 
objects  in  view  is  to  change  conditions  for  the  better,  and 
when  this  is  done  the  system  itself  may  also  be  changed.  Also, 
in  some  cases  there  are  results  that  remain  comparatively  con- 
stant from  year  to  year;  and  when  the  cost  system  has  estab- 
lished the  stability  of  these  results  by  detailed  methods  for 
one  or  two  years,  the  part  of  the  system  by  which  this  has 
been  done  may  be  dropped  and  the  results  considered  as  a 
constant  quantity.  There  is  little  benefit  in  verifying  estab- 
lished data,  especially  if  the  verification  is  involved  or  expen- 
sive, or  can  be  accomplished  approximately  by  other  means. 

Red  Tape 

Whatever  kind  of  system  is  devised,  every  precaution 
should  be  taken  to  avoid  making  it  top-heavy.  If  there  is  one 
thing  more  than  another  that  excites  criticism  of  a  cost  system, 
it  is  red  tape  that  does  not  justify  itself  in  practical  results. 
It  sometimes  shows  itself  in  a  mass  of  undigested  reports,  trou- 
blesome to  make  up  in  the  shop  and  impracticable  to  use  in 
the  office,  or  it  may  take  the  form  of  volumes  of  data  that  no 
one  ever  consults.  Another  form  of  red  tape,  not  uncommon, 
carries  small  items  of  cost  to  such  a  degree  that  the  process 
of  determining  these  costs  is  more  expensive  than  the  costs 
themselves. 

In  avoiding  these  pitfalls  the  cost  expert  will  sometimes 
appear  to  be  violating  the  fundamental  principles  of  cost-find- 
ing, when  as  a  matter  of  fact  he  is  only  preventing  them  from 
going  to  seed. 

Reports  for  Executives 

The  systematizer  must  constantly  keep  in  mind  the  prac- 
tical objects  and  purposes  of  the  cost  system.    The  system  it- 


4o6     THE  INSTALLATION  OF  A  COST  SYSTEM 

self  is  not  the  result;  it  is  only  the  means  by  which  results  are 
obtained  and  these  results  must  be  adequately  reported. 

If  the  cost  system  is  to  measure  shop  efficiency,  the  records 
that  will  show  these  final  results  are  the  comparative  analytical 
statements  prepared  at  the  end  of  every  cost  period.  The  ef- 
ficiency comparison  may  be  made  by  parallel  columns  or  by 
comparing  different  sheets.  Sometimes  the  various  expenses 
are  plotted  on  charts  so  as  to  show  at  a  glance  the  upward  or 
downward  tendency. 

The  completeness  of  the  expense  classification  depends 
upon  the  completeness  of  the  system,  and  as  stated  before,  this 
depends  upon  a  number  of  considerations.  In  a  thoroughly 
effective  system  the  manager  should  be  able  to  put  his  finger 
on  any  variation  in  any  item  of  expense  relating  to  any  class 
of  goods  or  to  any  department,  and  either  know  the  cause  of 
such  variation  or  be  able  to  investigate  and  discover  it.  Not 
only  can  variations  be  studied,  but  each  item  may  be  consid- 
ered by  itself  with  the  idea  of  applying  a  remedy  if  needed. 
In  short,  an  adequate  series  of  reports  of  cost  results  serves 
as  the  key  to  the  whole  manufacturing  situation,  giving  the 
management  positive  knowledge  of  the  facts  as  they  exist. 

Summary  of  Cost  Procedure 

The  summary  of  procedure  in  operating  a  cost  system 
may  be  concretely  presented  as  follows : 

1.  Charging  the  factory. 

2.  Receiving  and  storing  material. 

3.  Proving  and  charging  pay-rolls. 

4.  Delivering  material  to  operation. 

5.  Compiling  costs. 

6.  Crediting  production. 

7.  Distributing  factory  overhead. 

8.  Charging  production  to  stock. 

9.  Costing  sales  and  shipments. 


GENERAL  CONSIDERATIONS  407 

10.  Preparing  and  posting  the  summarizing  records. 

11.  Proving  subsidiary  records. 

12.  Preparing  and  proving  the  trial  balance. 

13.  Preparing  factory  and  financial  statements. 

1.  Charging  the  Factory 

The  factory  is  charged  with  its  material,  and  the  labor 
and  overhead  involved  in  securing  and  storing  this  material 
and  transforming  it  into  finished  goods.  The  material  charges 
are  obtained  from  the  invoices  and  analysis  of  purchases  rec- 
ord, or  from  the  accounts  payable  vouchers  and  voucher  reg- 
ister together  with  the  distribution  record  or  analysis  record. 
The  labor  charges  are  obtained  from  the  voucher  register, 
supported  by  an  accounts  payable  voucher,  or  from  the  pay- 
roll analysis.  The  overhead  charges  are  obtained  from  the 
invoices,  together  with  the  purchase  record  or  accounts  payable 
vouchers  and  voucher  register,  supplemented  by  the  distribu- 
tion record  or  analysis  record.  These  records  should  be  sup- 
ported by  the  detailed  purchase  requisitions,  purchase  orders, 
and  report  of  materials  and  supplies  received. 

2.  Receiving  and  Storing  Material 

The  material  is  to  be  stored  in  the  various  storerooms 
and  operating  departments,  and  its  quantity  and  value  is  re- 
corded upon  raw  materials  stores  ledger  accounts.  The  entries 
for  this  record  are  obtained  from  the  invoices,  supported  by 
the  report  of  material  received,  purchase  order,  and  purchase 
requisition.  A  summary  of  material  received  may  be  prepared 
presenting  the  information  in  form  for  posting  to  stores  ledger 
accounts. 

3.  Proving  and  Charging  Pay-Rolls 

Pay-roll  records  for  paying  employees  are  prepared  from 
time  reports  and  miscellaneous  labor  reports;  and  an  analy- 


4o8  THE  INSTALLATION  OF  A  COST   SYSTEM 

sis  of  the  pay-roll  is  prepared  from  the  same  detailed  reports 
and  proved  to  ascertain  the  departmental  charges. 

4.  Delivering  Material  to  Operation 

Information  as  to  transfers  of  material  from  stock  and 
from  miscellaneous  storerooms  to  operation  are  obtained  from 
material  requisitions,  departmental  material  records,  stock 
transfer  records,  and  miscellaneous  material  reports,  these  de- 
tailed reports  being  posted  to  the  detailed  stores  ledger  ac- 
counts. The  same  information  is  posted  to  the  detailed  cost 
sheets  and  miscellaneous  cost  records,  including  process  cost 
records. 

5.  Compiling  Costs 

The  compilation  of  costs  includes  the  posting  of  material 
and  labor  reports,  the  details  of  which  are  transferred  to  the 
cost  sheets  or  other  cost  records,  including  process  cost  records. 

Provision  must  also  be  made  for  the  departmental  over- 
head affecting  the  various  jobs,  orders,  or  articles,  and  the 
overhead  should  be  recorded  upon  the  detailed  cost  sheets  or 
other  cost  records.  The  compilation  made  upon  these  cost 
sheets  and  records,  and  the  total  cost  of  the  job,  order,  or  ar- 
ticle should  be  thoroughly  checked  and  compared  with  pre- 
determined, estimated,  standard,  or  previous  cost. 

6.  Crediting  Production 

Provision  should  be  made  for  summarizing  the  production 
and  crediting  the  factory,  at  the  same  time  distinguishing  be- 
tween good  and  defective  work.  Defective  work,  repair 
orders,  and  production  orders  should  all  be  summarized.  The 
detailed  information  for  preparing  the  production  summary 
is  obtained  from  the  miscellaneous  production  reports  and  the 
cost  information  from  the  cost  sheets  or  miscellaneous  cost 
records. 


GENERAL  CONSIDERATIONS  409 

7.  Distributing  Factory  Overhead 

Items  of  overhead  should  be  charged  to  departments. 
Non-productive  departmental  overhead  and  general  operating 
expenses  should  be  absorbed  in  the  productive  departmental 
overhead  rates  so  that  the  overhead  may  be  applied  to  the 
various  jobs,  orders,  articles,  or  processes. 

8.  Charging  Production  to  Stock 

Provision  should  be  made  for  summarizing  the  informa- 
tion in  regard  to  production  so  that  the  charges  to  the  various 
stock-rooms  may  be  ascertained.  The  information  for  pre- 
paring these  summaries  is  obtained  from  the  production  re- 
ports, the  supporting  cost  sheets,  and  other  cost  records.  The 
detailed  items  should  be  posted  to  the  raw  material,  finished- 
parts  stock,  and  finished  stock  stores  ledger  accounts  accord- 
ing to  the  destination  of  the  product. 

g.  Costing  Sales  and  Shipments 

The  shipping  orders  and  supporting  invoices  to  customers 
should  be  costed  and  a  summary  prepared  from  these  detailed 
reports.  The  returned  merchandise  received  from  customers 
should  also  be  separately  costed  and  summarized.  This  cost 
information  may  be  obtained  from  the  various  stock  records, 
cost  sheets,  or  cost  records.  The  merchandise  shipped  on  con- 
signment, and  merchandise  consigned  and  returned,  should  be 
treated  upon  separate  records. 

10.  Preparing  and  Posting  the  Summarizing  Records 

All  charges  to  the  factory,  transfers  of  material,  labor, 
overhead  items,  and  credits  to  departments,  should  be  listed 
for  the  purpose  of  obtaining  the  totals  to  be  posted  to  ledger 
accounts.  The  entries  to  the  ledger  accounts  may  be  made  di- 
rectly from  these  summarizing  records  to  the  general  or  fac- 
tory ledger,  depending  upon  the  method  of  control. 


410 


THE  INSTALLATION  OF  A  COST  SYSTEM 


11.  Proving  Subsidiary   Records 

The  various  subsidiary  records  should  be  proved  with  the 
controlling  raw  material,  work  in  process,  part-finished,  and 
finished  stock  accounts.  A  proof  should  then  be  made  with 
the  controlling  accounts  as  kept  in  the  general  ledger,  if  a 
separate  subsidiary  factory  ledger  is  kept. 

If  the  stock  records  show  perpetual  inventories,  provision 
should  be  made  for  testing  every  item  of  the  different  classi- 
fications of  the  merchandise  inventory  at  least  once  during  a 
fiscal  year. 

12.  Preparing  and  Proving  the  Trial  Balance 

The  trial  balance  of  the  factory  ledger  and  general  ledger 
may  now  be  prepared,  and  all  accounts  should  be  in  agreement 
with  the  various  subsidiary  records. 

13.  Preparing  Factory  and  Financial  Statements 

The  preparation  of  statements  includes  such  financial 
and  factory  statements  as  the  management  desires.  These  may 
be  supported  by  schedules  when  it  is  necessary  to  show  more 
detail.  Any  special  kind  of  statement  desired  may  be  prepared 
if  the  cost  system  shows  a  complete  history  of  all  factory 
transactions. 

Cost  Systems 

Cost  systems  are  of  two  kinds : 

1.  Estimated  or  predetermined  systems 

2.  Complete  cost  systems  according  to  the  order  method 

or  process  method  of  cost-finding 

Predetermined  costs  are  based  upon  estimated  or  stand- 
ardized cost  information  obtained  by  means  of  fixed  rates  or 
percentages,  or  by  means  of  complete  standardized  cost  rec- 
ords showing  the  totals  of  the  material,  labor,  and  overhead 
costs. 


GENERAL  CONSIDERATIONS 


411 


Actual  cost  systems  comprise  job,  order,  and  process  cost 
systems.  In  some  cases  the  last  two  methods  may  be  combined. 
In  other  cases  all  three  methods  may  be  used  in  the  same  plant. 

An  examination  of  the  plant  should  be  made  for  the  pur- 
pose of  ascertaining  the  requirements  and  the  system  or  meth- 
ods of  procedure  to  be  used. 

Forms  for  Cost  Records  and  Reports 

When  it  comes  to  the  question  of  choosing  or  designing 
the  forms  to  be  used  in  any  particular  case,  it  is  impossible 
to  exercise  too  great  care  and  foresight.  The  matter  is  one 
that  cuts  deeper  than  is  apparent  at  the  first  glance.  Funda- 
mentally, a  form  is  determined  by  the  question,  "What  do  I 
want  to  know?"  Not  only  the  form  but  the  system  to  be 
adopted  depends  on  the  answer  to  this  question.  The  next 
question  is,  "How  can  the  facts  best  be  obtained,  summarized, 
and  arranged,  so  as  to  get  the  most  out  of  them  with  the  least 
trouble  and  expense?"  This  cannot  be  answered  until  the 
type  of  system  to  be  installed  has  been  decided  upon. 

Any  cost  system  should  be  so  arranged  that  its  several 
parts  will  fit  into  the  scheme  naturally  and  conveniently.  Spe- 
cial forms  need  not  be  provided  in  all  cases  for  summarizing 
purposes;  in  many  cases  summarizations  may  be  made  upon 
the  same  form  on  which  the  original  data  is  compiled,  and 
where  this  is  not  practicable,  standardized  columnar-ruled  pa- 
per may  answer  the  purpose.  The  forms  for  gathering  the 
data  at  first  hand  should  be  designed  with  the  idea  of  getting 
the  necessary  information  accurately  but  with  the  least  dis- 
turbance to  the  workmen  and  to  shop  routine. 

Forms,  as  intimated,  may  be  so  arranged  that  they  may 
be  used  for  more  than  one  purpose.  This  double  purpose  is 
accomplished  either  by  making  the  form  more  general  or  in- 
clusive in  design,  or  by  making  extra  copies.  In  actual  prac- 
tice, while  the  same  forms  may  be  used  for  different  purposes 


412     THE  INSTALLATION  OF  A  COST  SYSTEM 

the  same  data  should  not  be  collected  over  and  over  again. 
The  forms  as  shown  in  the  present  volume  sometimes  overlap 
but  this  is  because  it  is  necessary  to  show  what  uses  can  be 
made  of  each  form — not  what  uses  should  be  made. 

The  forms  submitted  are  limited  in  number  and  have  been 
carefully  selected  rather  as  suggestions  to  work  from  than  as 
examples  from  which  to  choose.  The  forms  are  not  all  shown 
with  provision  for  binding  but  this  can  be  easily  supplied  when 
necessary.  Forms  are  most  securely  preserved  if  bound  in  a 
loose-leaf  binder. 

A  careful  inspection  and  comparison  of  related  forms  will 
often  suggest  minor  changes  that  will  adapt  them  to  other  sys- 
tems. Adding  a  new  column  or  changing  the  classifications 
will  often  enlarge  the  scope  of  a  form  more  than  would  seem 
possible.  No  attempt  has  been  made  to  explain  all  the  func- 
tions that  each  design  may  perform,  the  object  being  to  cover 
only  its  main  functions. 

Presenting  Report  on  Cost  Systems 

If  the  services  of  a  professional  cost  accountant  are  en- 
gaged to  devise  a  new  cost  accounting  system  or  a  modifica- 
tion of  an  existing  system,  he  should  be  asked  to  present  a 
report  containing  the  following  information: 

1.  A  general  statement  as  to  the  purpose  and  scope  of 

the  new  system,  or  reasons  for  changes  in  the  ex- 
isting system,  together  with  the  advantages  and 
arguments  in  favor  of  the  new  methods  as  com- 
pared with  the  old  methods. 

2.  An  explanation  in  detail  of  all  new  forms,  summar- 

izing records,  ledgers,  and  ledger  accounts  re- 
quired. Instructions  should  be  given  as  to  the 
reasons  for  and  methods  of  recording  the  cost 
data  required  and  as  to  its  disposition  in  each  case. 
It  should  be  stated  by  whom  each  record  is  to  be 


GENERAL  CONSIDERATIONS 


413 


prepared  and  how  it  is  to  be  handled,  and  finally, 
how  the  cost  information  is  to  be  filed, 
3.  The  forms  to  be  used,  drawn  in  their  actual  working 
size  and  presented    in  logical   order,   with  their 
proper  rulings  and  headings  inserted. 

It  may  be  emphasized  that  the  report  should  definitely 
describe  the  duties  of  each  cost  and  factory  clerk  under  the 
new  system  and  the  method  of  doing  each  portion  of  their 
work.  Also,  it  is  often  advisable  to  submit  a  schedule  showing 
the  dates  when  the  various  summarizing  records  and  reports 
to  the  executives  and  department  heads  should  be  ready. 
Such  a  schedule  serves  as  a  record  for  judging  the  efficiency 
of  the  members  of  the  cost  department,  as  it  places  the  respon- 
sibility for  preparing  each  summarizing  record  and  report 
upon  a  particular  individual. 

After  the  above  information  has  been  presented  and  those 
interested  have  had  time  to  give  it  thorough  consideration,  a 
conference  should  be  held  so  that  additional  information  may 
be  given  or  any  points  which  are  not  sufficiently  clear  in  the 
original  report  may  be  elaborated.  Any  differences  of  opinion 
should  be  satisfactorily  adjusted  before  the  installation  of  a 
new  system  if  any  changes  are  made  in  an  existing  system. 


CHAPTER  XXV 

INSTALLING  A  COST  SYSTEM— EXAMINATION  OF 

PLANT 

Nature  of  Examination 

The  basis  of  any  successful  cost  system  must  be  sought 
in  the  manufacturing  operations.  This  presupposes  a  physical 
examination  of  the  plant  in  which  a  cost  system  is  to  be  in- 
stalled. It  is  not  enough  to  inspect  the  books,  as  an  analysis 
of  the  accounts  and  records  cannot  furnish  all  the  necessary 
data.  The  extent  and  character  of  the  information  required  is 
limited  only  by  the  boundaries  of  the  business,  and  the  classi- 
fication of  this  information  is  a  matter  of  the  highest  im- 
portance to  the  systematizes  He  should  have  a  definite  plan 
of  procedure  and  each  question  he  may  ask  should  have  its 
definite  place  and  object.  In  other  words,  the  examination 
should  be  systematic  and  thorough. 

The  character  of  the  information  desired  determines  the 
scope  of  the  examination.  If  a  complete  cost  system  is  to  be 
devised  and  installed  the  examination  of  the  plant  must  ob- 
viously be  more  searching  than  if  the  cost  accountant  is  merely 
to  make  suggestions  for  the  improvement  of  existing  cost- 
finding  methods.  However,  it  is  always  advisable  to  make 
a  fairly  thorough  examination.  Suggestions  made  after  a 
partial  or  superficial  examination  are  often  found  to  be  im- 
practical because  peculiarities  of  the  particular  industry  which 
modify  its  cost  accounting  requirements  have  not  been  dis- 
covered. 

The  usual  method  of  making  an  examination  of  a  manu- 
facturing plant  for  cost  accounting  purposes  is  to  begin  with 

414 


EXAMINATION  OF  PLANT 


41s 


the  receiving  department,  where  the  raw  materials  and  sup- 
plies are  received,  and  end  with  the  office  records.  The  cost 
accountant  in  charge  should  follow  step  by  step  from  the  re- 
ceipt of  raw  material  through  each  process  of  manufacture 
to  the  finished  product,  studying  the  method  of  storing  the 
product  at  each  point  where  a  storeroom  enters  into  the  regu- 
lar operation.  The  auxiliary  activities  of  the  plant,  as  they 
arise  in  connection  with  the  manufacturing  operations,  must 
also  be  studied.  Circumstances  in  each  particular  case  will 
determine  just  where  in  the  investigation  the  various  pro- 
ductive and  non-productive  departments  and  storerooms  should 
be  considered. 

The  general  method  of  cost-finding  required  in  any  par- 
ticular plant  will  be  suggested  by  the  nature  of  the  product 
and  processes  and  one  of  the  first  steps  must  be  to  see  that  the 
lines  are  properly  drawn  between  processes  so  as  to  provide 
for  a  working  system  of  operating  departments. 

Examination  of  an  Existing  Cost  System 

In  modifying  or  replacing  an  existing  cost  system  the  fol- 
lowing matters  must  be  considered: 

1.  Product  classification. 

2.  Departments  of  the  factory  and  the  manufacturing 

processes  in  these  departments. 

3.  Factory  orders  and  method  of  starting  the  work  in 

the  various  departments  of  the  plant. 

4.  Raw  material  and  storeroom  requirements  and  the 

detailed  material  reports  in  use. 

5.  Labor  and  labor  reports  in  use. 

6.  Departmental  application  of  overhead  items  and  the 

general  distribution  of  the  factory  overhead,  in- 
cluding reports  which  are  necessary  for  recording 
this  information, 

7.  Method  of  reporting  production  and  the  reports  used. 


4i6  THE  INSTALLATION  OF  A  COST  SYSTEM 

8.  Storeroom  requirements  for  finished  stock,  finished 

parts  stock,  and  reports  incidental  thereto. 

9.  Method  of  compiHng  the  detailed  costs,  supplemented 

by  a  study  of  the  cost  sheets  and  other  cost  records. 

10.  Cost  summarizing  records,  supplemented  by  a  study 

of  the  methods  by  which  the  information  is  ob- 
tained for  entry  upon  the  various  accounts  af- 
fected. 

11.  The  general  accounting  records  which  are  used  for 

the  purpose  of  making  the  original  entries. 

12.  The  general  accounting  system  in  use,  giving  partic- 

ular attention  to  the  factory  accounts. 

13.  The  statements  to  be  prepared,  the  general  method 

of  presenting  them,  and  the  results  obtained  by 
their  preparation. 

A  general  outline  embodying  much  of  the  required  in- 
formation may  be  made  at  the  first  conference  with  the  man- 
agement and  before  the  examiner  inspects  the  factory  depart- 
ments. While  the  examination  is  being  made,  the  examiner 
should  consider  the  place  of  each  feature  in  the  cost  system 
and  what  special  modifications  are  needed  to  make  the  system 
fit  the  conditions  as  they  exist.  He  must  at  all  times  watch 
for  any  other  data  that  may  help  him  in  suggesting  changes 
in  the  system,  and  note  carefully  any  defects  and  inefficien- 
cies disclosed  by  his  examination. 

It  must  not  be  thought,  however,  that  the  examination  it- 
self will  discover  anything  more  than  "surface"  defects;  it 
remains  for  the  modified  cost  system,  when  it  is  finally  in- 
stalled, to  detect  and  locate  all  inefficiencies  which  lie  beneath 
the  surface. 

Also  a  watch  should  be  kept  for  leaks,  especially  in  places 
where  they  may  exist  unnoticed.  Lost  or  spoiled  material  and 
idle  time  are  among  the  more  prominent  and  more  costly 
leaks.    Large  losses  are  sometimes  incurred  by  the  failure  to 


EXAMINATION  OF  PLANT  417 

completely  check  material  received,  as  in  cases  where  barrels 
are  not  opened  to  see  that  they  are  full.  Spoiled  material  is 
likely  to  be  concealed  if  the  method  of  reporting  production 
is  not  good.  Time  may  be  lost  through  poor  management  on 
the  part  of  foremen,  especially  where  the  departments  are  not 
well  balanced  and  where  the  men  in  one  department  wait  for 
work  from  another  department. 

Time  lost  in  carrying  materials,  crowding  of  aisles  with 
goods,  scattering  of  men's  time  on  odd  jobs,  unnecessary  con- 
sumption of  power,  waste  of  scrap  material,  inconvenience  in 
location  of  tools  and  dies,  poor  wash-room  and  toilet  facili- 
ties, are  all  items  that  should  receive  attention,  as  losses  are 
often  incurred  which,  although  small  in  any  special  case, 
are  considerable  when  spread  over  the  whole  factory. 

The  examiner  should  also  take  note  of  all  places  where 
the  work  seems  to  be  going  on  in  a  half-hearted  manner. 
Such  work  will  require  attention,  and  perhaps  special  meas- 
ures, but  the  better  results  secured  will  well  justify  it.  Mat- 
ters of  heat,  light,  and  ventilation  are  most  important;  bad 
air  makes  the  men  dull  and  listless,  and  often  causes  the  pro- 
duction of  an  entire  department  to  drag. 

Efficiency  Details 

In  any  examination  in  addition  to  collecting  constructive 
information  for  the  purposes  of  his  installation,  the  cost  ac- 
countant should  constantly  watch  for  possibilities  of  increas- 
ing efficiency.  These  might  include  such  things  as  the  im- 
provement of  wage  systems;  improvement  in  arrangement  of 
the  plant;  improvements  in  the  routine  manner  of  handling 
machines;  removal  of  congestions  in  the  various  departments; 
improvements  in  the  method  of  storing  raw  materials,  supplies, 
and  various  items  composing  finished  stock ;  suggestions  as  to 
the  method  of  handling  tool  room  records;  suggestions  as  to 
plant  asset  records. 


4i8  THE  INSTALLATION  OF  A   COST   SYSTEM 

Procedure  for  Examination  of  a  Plant 

It  is  suggested  that  the  cost  accountant  examining  a  plant 
have  with  him  a  schedule  of  procedure  which  will  enable  him 
to  classify  his  information  and  keep  him  from  overlooking  im- 
portant details.  The  suggestions  which  follow,  while  suitable 
for  this  purpose,  are  not  expected  to  cover  every  possible 
condition.  The  examiner  in  charge  will  be  able,  however,  in 
any  case  to  cover  a  large  portion  of  his  investigation  by  using 
these  queries  and  suggestions  and  may  supplement  them  with 
additional  information  whenever  necessary.  It  is  impossible 
to  obtain  information  in  too  great  detail. 

I.  Product  Classification 

The  catalogue  and  other  advertising  literature  published 
by  the  company,  including  circulars  of  a  descriptive  character, 
often  furnish  the  basis  for  a  complete  product  classification. 
Additional  information  may  be  obtained  from  the  sales  rec- 
ords or  any  finished  stock  records  which  may  be  kept.  If 
product  classifications  are  lacking,  the  following  procedure  will 
supply  the  deficiency : 

(i)  Obtain  description  of  all  product  sold,  whether 
manufactured  or  purchased  to  be  sold  in  its  orig- 
inal state.  (A  distinction  should  be  made  be- 
tween product  manufactured  and  product  upon 
which  no  manufacturing  operations  are  done.) 

(2)  Supply  or  suggest  headings  for  the  main  divisions 

of  the  product  manufactured. 

(3)  Supply  or  suggest  subdivisions  which  may  be  used 

under  each  of  the  main  divisions  if  a  more  de- 
tailed product  classification  is  desired. 

(4)  Obtain  views  of  the  executives  of  the  sales  depart- 

ment, purchasing  department,  accounting  depart- 
ment, and  production  manager,  on  the  product 
classification  which  is  contemplated. 


EXAMINATION  OF  PLANT 


419 


Obtain  catalogue  if  one  is  in  use. 

Any  additional  information  that  may  be  helpful. 


2.  Sales  Department 

Ascertain  manner  of  selling  product. 

Ascertain  amount  of  sales  annually. 

Are  sales  evenly  distributed  over  the  year,  or  are 
they  seasonal?    If  so,  why? 

Are  sales  classified,  and  if  so,  how? 

Are  any  branch  warehouses,  offices,   or  agencies 
maintained?     If  so,  how  handled? 

Any  mail  order  business?     If   any,   under  what 
plan? 

Any  retail  department?     How  handled? 

How  many  salesmen  employed — on  salary  or  com- 
mission ? 

Any  records  of  salesmen  by  territory? 

Any  records  of  profits  on  sales  of  each  man  as 
above? 

Any  statistics  as  to  sales  and  salesmen;  are  they 
compiled  regularly  or  only  at  intervals? 

Any  advertising  plan?     Obtain  description  of  it 
and  the  records  kept. 

Obtain  description  of  follow-up  system,  if  any. 

Obtain  description  of  filing  system. 

Obtain  description  of  freight  rate  records,  if  any. 

Obtain  list  of  office  force  and  duties  of  each. 

Obtain  copies  of  all  forms  or  books,  including  route 
lists,  salesmen's  reports,  expense  accounts,  quo- 
tation records. 
(18)  Any  additional  information. 


3.  Departments  of  the  Factory  and  Manufacturing  Processes 

The  underlying  purpose  of  an  organization  is  to  bring 
each  and  every  activity  of  the  plant  under  the  notice  and  con- 


420  THE  INSTALLATION   OF  A  COST   SYSTEM 

trol  of  the  men  responsible  for  its  proper  operation.  Thus, 
each  department  should  be  considered  in  its  relation  to  the 
preceding  and  succeeding  departments,  and  the  methods  by 
which  its  operations  and  production  are  reported  and  con- 
trolled should  be  carefully  studied. 

As  far  as  possible,  each  productive  department  should  be 
limited  to  single  operations  in  order  to  provide  an  intelligent 
basis  for  compiling  the  costs.  The  information  relative  to 
the  machinery  should  include  cost,  floor  space,  and  in  fact  all 
data  necessary  for  the  calculation  of  assignable  factory  over- 
head items.  In  considering  the  distribution  of  the  power  cost 
item,  it  should  be  determined  whether  tests  for  power  have 
ever  been  made  and  if  so  whether  the  conditions  make  it  de- 
sirable for  the  tests  to  be  brought  up  to  date. 

The  general  arrangement  of  the  departments  and  the  ma- 
chinery should  be  examined  very  closely  with  the  idea  of  mak- 
ing all  processes  as  continuous  as  possible.  Much  time  and 
money  are  wasted  in  rehandling  material  when  machines  are 
badly  placed  in  regard  to  each  other. 

The  average  and  minimum  efficiency  of  the  machines 
should  be  ascertained,  and  whether  they  are  automatic  or  other- 
wise. This  latter  point  is  often  important  in  arranging  de- 
tails for  gathering  and  compiling  costs.  If  a  machine  rate 
is  to  be  used,  the  examination  should  be  unusually  detailed 
and  thorough. 

All  manufacturing  processes  and  operations  should  be 
specifically  designated.  If  the  names  of  the  operations  are 
not  definite  enough  in  themselves  to  suggest  the  exact  nature 
of  the  manufacturing  process,  a  detailed  description  of  the 
process  or  operation  should  supplement  each  name. 

A  request  for  the  following  data  will  furnish  detailed 
information  as  to  the  operating  conditions  in  the  plant : 

(i)   How  many  plants  are  in  operation  and  where  are 
they  located?     Obtain  description  of  them. 


EXAMINATION  OF  PLANT  421 

(2)  Are  any  other  plants  controlled  by  this  concern? 

(3)  If  possible,  obtain  sketch  of  floor  space  of  plant 

and  indicate  space  occupied  by  each  department. 
Obtain  blue-print  if  it  may  be  had. 

(4)  Obtain  land  area  and  ascertain  how  it  is  occupied. 

(5)  Is  plant  owned  or  rented? 

(6)  Could  plant  be  improved  as  to  arrangement  without 

any  material  expense  ? 

(7)  Ascertain  whether  a  maintenance  record  is  kept  for 

buildings,  machinery,  and  equipment,  and  if  so, 
obtain  detailed  explanation  of  the  method  of  keep- 
ing and  using  the  record. 

(8)  Get  name  of  each  department. 

(9)  Get  name  of  the  foreman  or  supervising  head  of 

each  department. 

( 10)  Ascertain  number  of  employees,  classified  as  to  pro- 

ductive and  non-productive  workers. 

(11)  Ascertain    method    of    paying    wages,    classifying 

piece-workers,  day-workers,  bonus-workers,  pre- 
mium-workers, etc. 

(12)  Does  the  foreman  appear  to  be  competent?    What 

are  the  duties  of  his  assistants  and  of  the  depart- 
ment clerks? 

(13)  Are  instructions  given  to  the  department  employ- 

ees verbally  or  in  writing? 

(14)  Are   blue-prints,    drawings,    models,   and    sketches 

furnished  in  all  cases  where  desired? 

(15)  Obtain  list  of  machines  in  the  departments  and  the 

different  processes  and  labor  operations  in  use. 

(16)  Where  the  name  of  the  machine  does  not  clearly 

indicate  its  purpose,  obtain  description.  Also  as- 
certain which  are  automatic  or  semi-automatic, 
and  get  description  of  groups  when  they  are  op- 
erated by  one  person  or  a  team. 


422 


THE  INSTALLATION  OF  A  COST  SYSTEM 

(17)  Obtain  complete  description  of  any  machines  which 

are  obsolete  or  inefficient. 

(18)  Are  machines  arranged  to  the  best  advantage  for 

economical   operation?     Suggest  improvements. 

(19)  Are  there  high-speed  machines  or  tools  used?     If 

so,  obtain  description. 

(20)  Are  the  machines  operated  as  rated  by  the  makers 

or  have  any  attempts  been  made  to  increase  their 
efficiency  ? 

(21)  Are  there  any  counters  upon  any  of  the  machines? 

If  so,  on  which?  On  what  other  machines  might 
counters  be  useful? 
{22)  If  tempering  or  heating  or  drying  furnaces  are  in 
use,  ascertain  their  purpose  and  obtain  full  de- 
scription. Also  ascertain  kind  of  fuel  used,  and 
any  items  of  cost  peculiar  to  each  furnace. 

(23)  Are  all  machines  numbered? 

(24)  Is  there  a  separate  tool  room,  and  how  are  tools 

obtained  and  followed  when  they  are  used  by 
different  employees? 

(25)  What  is  method  of  numbering  and   cataloguing 

tools  ? 

(26)  Do  workmen  keep  own  tools  in  repair,  or  is  there 

a  toolmaker  employed  for  that  purpose? 
(2y)  Are  machines  and  transmission  appliances  guarded 
to  protect  employees  against  accident? 

(28)  Are  there  any  tool  or  pattern  mainterance  records? 

(29)  Are  there  any  efficiency  records  in  connection  with 

either  men  or  machines? 

(30)  What  sort  of  power  is  employed,  and  how  distrib- 

uted; i.e.,  by  individual  motors,  group  motors,  a 
single  motor,  or  direct  from  line  shaft? 

(31)  Is  there  any  record  of  power  cost  either  for  de- 

partments as  a  whole,  or  as  applied  to  machines? 


EXAMINATION  OF  PLANT 


423 


(32)  Is  natural  lighting  good?     If  deficient,  why?     If 

possible,  suggest  improvements. 

(33)  Obtain  complete  list  of  operations  performed  in 

each  department,  indicating  hand  and  machine 
work;  also  descriptions  of  any  that  are  excep- 
tional and  peculiar. 

(34)  Are  operations  standardized  as  to  time,  machines, 

speed,  tools,  etc.  ? 

(35)  Are  there  any  defective  methods  of  performing  op- 

erations?    Suggest  improvements,  if  possible. 

(36)  Obtain    description    of    time-keeping    system    and 

method  of  reporting  labor  cost  information. 

(37)  Is  there  any  lost  or  idle  time?     If  so,  why? 

(38)  Obtain  description  of  bonus  or  premium  system  in 

force. 

(39)  How  are  materials  obtained  and  charged  to  pro- 

duction ? 

(40)  Is  it  necessary  to  issue  materials  in  excess  of  im- 

mediate requirements  at  times?  If  so,  how  is  the 
excess  cared  for? 

(41)  How  is  defective  work  reported  and  disposed  of? 

(42)  Are  there  any  methods  to  check  the  replacing  of 

materials  that  have  been  spoiled  ? 

(43)  Do  requisitions  for  replaced  material  indicate  the 

purpose  of  the  withdrawal? 

(44)  Is  there  any  undue  waste  of  material  or  time?    If 

so,  suggest  remedy. 

(45)  How  is  legitimate  waste  material  disposed  of?     If 

used  again,  how? 

(46)  Is  all  work  properly  tested  or  inspected? 

(47)  Is  work  inspected  by  operation,  or  only  when  en- 

tirely completed? 

(48)  Are  there  any  delays  in  departments  due  to  faults 

of  other  departments?     If  so,  what  are  they? 


424 


THE  INSTALLATION  OF  A  COST   SYSTEM 


(49)  Is  any  attempt  made  to  regulate  the  degree  of  hu- 

midity in  departments?  How  are  they  venti- 
lated ? 

(50)  If  manner  of  reporting  production  or  progress  in 

any  one  department  differs  in  any  way  from 
others,  ascertain  the  difference.  If  production  is 
checked,  learn  method  in  use. 

(51)  How  are  parts  belonging  to  repair  jobs  stored  and 

marked  ? 

(52)  Are  any  samples  made  for  showrooms,  demonstra- 

tion, or  salesmen?  If  so,  how  handled  as  to 
accounting  ? 

(53)  Is  there  any  friction  or  dissatisfaction  of  any  sort? 

If  so,  what  is  it? 

(54)  Do  the  departments  appear  to  be  efficient  as  a  whole, 

or  is  there  an  indication  of  laxity  ? 

(55)  Obtain  copies  of  all  forms. 

(56)  Any  additional  information. 

The  above  information  should  be  obtained  for  each  de- 
partment of  the  plant  so  far  as  the  suggestions  apply.  Any 
additional  data  which  is  necessary  to  cover  peculiar  require- 
ments incidental  to  a  special  department  or  plant  should  be  ob- 
tained. Some  of  the  special  departments  which  should  receive 
particular  attention  are  mentioned  in  the  paragraphs  which 
follow. 

4.  Foundry  Department 

In  the  case  of  the  foundry  department,  the  same  inquiries 
as  used  for  manufacturing  departments  may  be  applied  so  far 
as  they  will  fit.  In  addition  the  various  classes  of  molding 
should  be  ascertained,  viz.,  machine,  snap,  floor,  pit,  regular 
bench,  etc.,  as  well  as  the  different  classes  of  output,  the  char- 
acter of  mixtures,  and  other  information,  as  follows: 


EXAMINATION  OF  PLANT 


425 


(i)   Do  mixtures  vary  in  the  same  melt? 

(2)  What  is  number  of  melts  per  week? 

(3)  What  is  cleaning  process? 

(4)  What  is  manner  of  making  calculations  at  present? 

(5)  What  is  manner  of  ascertaining  production  and 

waste  ? 

(6)  Is  work  planned  in  advance? 

(7)  Are  flasks,  rigging,  and  tools  cared  for  and  placed 

conveniently  for  use? 

(8)  Are  iron  or  wooden  flasks  used? 

(9)  Are  there  any  special  methods  of  molding? 

(10)  What  is  condition  of  cupolas,   furnaces,  or  other 
equipment,  etc.? 

5.  Plating  Room 

The  same  inquiries  as  for  manufacturing  departments  may 
be  used  for  the  plating  room,  wherever  applicable.  Informa- 
tion should  be  obtained  as  to  whether  anodes  or  salts  are  used, 
and  how  consumption  and  amount  of  deposit  is  ascertained. 
Any  special  processes  should  be  noted,  and  also  the  number 
of  small  pieces  immersed  in  one  hangar,  the  difficulties,  etc. 

6.  Wood-working  Shops 

In  wood-working  shops  the  line  of  investigation  outlined 
for  manufacturing  departments  should  be  pursued,  bearing 
in  mind  that  wastes  and  consumption  of  material  are  the  most 
puzzling  features  of  such  plants.  Information  should  be  ob- 
tained particularly  from  an  accounting  standpoint  as  to  the 
methods  employed  for  determining  consumption  of  materials 
and  the  treatment  of  wastes  suitable  for  further  use. 

7.  Dry  Kilns 

(i)   What  is  type  of  kilns  used;  that  is,  direct  heat  or 

vapor  process  ? 
(2)   What  is  equipment  and  manner  of  operating? 


426  THE  INSTALLATION  OF  A  COST   SYSTEM 

(3)  Is  exhaust  steam  or  live  steam  used? 

(4)  Is  lumber  measured  or  weighed  in  and  out?     If 

not,  how  is  quantity  dried  accounted  for? 

(5)  Obtain  information  as  to  special  fire  protection,  if 

any. 

(6)  How  far  away  from  factory  buildings  are  dry  kilns 

located  ? 

(7)  Is  any  attempt  made  to  record  cost  of  drying?    If 

so,  obtain  particulars. 

(8)  Ascertain  number  of  employees  and  their  duties. 

(9)  Obtain  copies  of  all  records. 
(10)  Any  additional  information. 

8.  Power  Department 

( 1 )  Obtain  list  of  equipment  fully  described  as  to  kind 

and  capacity  of  engines,  boilers,  dynamos,  pumps, 
heaters,  condensers,  etc.,  as  well  as  to  the  condi- 
tion of  the  equipment. 

(2)  How  frequently  are  boilers  cleaned? 

(3)  Is  there  any  reserve  capacity? 

(4)  Is  equipment  deficient  in  any  respect?  If  so,  how? 

(5)  Are  there  special  safeguards  against  accidents? 

(6)  Is  power  plant  in  one  unit?    If  more  than  one  unit, 

obtain  description  of  each  unit  separately. 

(7)  Are  all  buildings  heated  from  the  central  power 

plant  ? 

(8)  Obtain  description  of  the  records  showing  power 

and  heat  distribution. 

(9)  Obtain  description  of  records  which  show  the  dis- 

tribution of  light. 

(10)  Obtain  description  of  any  record  which  may  be  kept 

for  air  distribution. 

(11)  Obtain  description  of  any  records  which  may  be 

kept  for  engine  efficiency. 


EXAMINATION  OF  PLANT  427 

(12)  Obtain  description  of  records  showing  fuel  con- 

sumption. 

(13)  Obtain  description  of  records  showing  the  consump- 

tion of  miscellaneous  supplies  used. 

(14)  Is  exhaust  steam  returned  to  boilers? 

(15)  How  many  employees  are  there  and  what  are  the 

duties  of  each? 

(16)  Obtain  copies  of  all  records. 

(17)  Any  additional  information. 

9.  Packing  Department 

( 1 )  May  this  department  be  considered  a  productive  or 

a  non-productive  department? 

(2)  What  sort  of  package  and  what  kinds  of  packing 

materials  are  used  ? 

(3)  Are  packages  manufactured  or  produced? 

(4)  How  are  packing  materials,  including  nails,  twine, 

wire,  etc.,  obtained? 

(5)  Obtain  description  of  records  which  show  consump- 

tion of  materials. 

(6)  How  are  values  of  the  various  materials  obtained 

as  applying  to  each  particular  shipment  ? 

(7)  Ascertain  number  of  employees  and  their  duties. 

(8)  How  is  time  and  labor  cost  recorded  and  applied? 

(9)  How  are  deliveries  made  to  shipping  department, 

and  how  accounted  for? 

(10)  Obtain  description  of  machines  or  mechanical  ap- 

pliances which  are  used. 

(11)  Obtain  copies  of  all  forms  used. 

(12)  Any  a,dditional  information. 

10.  Shipping  Department 

(i)   How  are  shipments  checked  out? 

(2)  What  is  relation  between  factory  and  sales  orders? 


428  THE  INSTALLATION  OF  A  COST  SYSTEM 

(3)  What  records  are  kept  and  what  reports  are  made 

to  the  cost  office  and  general  office? 

(4)  'Are  shipments  made  from  own  siding  or  trucked 

to  railroad  stations? 

(5)  How  are  partial  shipments  handled  and  recorded? 

(6)  What  mechanical  aids  are  used? 

(7)  How  many  employees  are  there  and  what  are  their 

duties  ? 

(8)  Obtain  copies  of  all  forms. 

(9)  Any  additional  information. 

11.  Estimating  Department 

The  organization  of  this  department  should  be  consid- 
ered, and  its  relation  to  the  cost,  sales,  and  other  departments 
of  the  organization  should  be  fully  described. 

(i)  Ascertain  number  of  employees  and  the  duties  of 
each. 

(2)  Obtain  full  description  of  the  methods  of  making 

estimates. 

(3)  Obtain  description  of  the  system  in  use  for  check- 

ing estimates  as  to  material,  labor,  and  overhead 
costs. 

(4)  Obtain  copies  of  all  forms. 

(5)  Any  additional  information. 

12.  Cost  Department 

Where  a  cost  department  is  operated,  a  thorough  exam- 
ination of  all  work  done  by  this  department  should  be  made. 

( 1 )  Obtain  a  list  of  the  names  of  all  clerks  and  a  full 

description  of  the  work  done  by  each. 

(2)  Obtain  a  list  of  all  forms  and  records  in  use  to- 

gether with  the  information  contained  in  each 
and  the  purpose  of  each. 

(3)  Obtain  complete  information  as  to  the  various  re- 


EXAMINATION   OF  PLANT 


429 


ports  rendered  to  different  executives  and  de- 
partment heads.  Obtain  description  of  each  re- 
port in  detail  and  its  purpose. 

(4)  Ascertain  the  provision  for  filing  the  various  forms 
and  disposition  of  the  detailed  reports  and  rec- 
ords. 

(  5  )  Any  additional  information. 

13.  Factory  Orders 

(i)  Obtain  description  of  the  various  kinds  of  factory 
orders  in  use. 

(2)  What  is  method  of  preparing  orders? 

(3)  Ascertain  number  of  copies  of  orders  issued  and 

how  they  are  sent  to  the  various  departments  of 
the  plant. 

(4)  Obtain  full  description  of  the  information  contained 

upon  each  copy  of  the  factory  order.  How  is 
each  copy  used  and  what  is  its  final  disposition? 

(5)  Who  is  responsible  for  the  issuance  of  factory  or- 

ders and  how  are  they  issued  ? 

(6)  Is  an  order  department  maintained  as  a  separate 

department  of  the  organization? 

(7)  How  are  factory  orders  registered? 

(8)  What  is  the  relation  between  sales  orders  and  fac- 

tory orders  ? 

(9)  What  is  the  relation  between  factory  orders  and 

shipping  orders? 

(10)  Obtain  copies  of  all  forms  used  in  connection  with 

factory  orders  and  registering  of  same. 

(11)  Any  additional  information. 

14.  Raw  Material  and  Storeroom  Requirements 

How  raw  material  is  received,  checked,  stored,  and  put 
into  operation  should  be  noted  carefully.  It  may  then  be  fol- 
lowed through  the  factory  step  by  step  until  it  is  transformed 


430 


THE  INSTALLATION  OF  A  COST  SYSTEM 


into  finished  stock.  The  minimum  and  maximum  quantities 
necessary  should  be  known,  and  the  disposition  or  utilization 
of  the  waste  and  scrap  material  should  also  be  looked  into 
carefully.  The  item  of  by-products  should  receive  special 
attention. 

The  methods  of  storing  raw  material  and  part-finished 
stock  and  the  possibilities  of  improvements  should  be  con- 
sidered. If  a  stock  system  is  not  in  use,  there  is  no  other  place 
where  leaks  are  more  likely  to  be  found  than  in  the  storeroom. 
Every  business  man  insists  that  his  cash  be  accounted  for  to 
the  exact  cent,  yet  it  is  not  uncommon  in  a  badly  organized 
plant  to  see  hundreds  of  dollars'  worth  of  material  scattered 
about  without  any  method  of  safeguarding  it  or  accounting 
for  its  use.  The  expense  and  trouble  of  keeping  stock  records 
are  usually  saved  many  times  over  by  the  saving  in  stock  and 
the  practical  convenience  of  being  able  to  tell  at  any  time  ex- 
actly how  much  stock  is  on  hand  and  where  it  is  located. 

Each  stock-room  should  be  examined,  as  it  is  necessary 
to  handle  bulk  materials,  such  as  pig  iron,  lumber,  etc.,  sepa- 
rately from  the  smaller  material  items.  In  connection  with 
raw  material,  the  purchasing  department,  receiving  department, 
and  storeroom  requirements  should  all  receive  attention. 

15.  Purchasing  Division 

(1)  Are  purchases  made  on  verbal  or  written  requisi- 

tions?    Obtain  full  particulars. 

(2)  Is  there  any  one  responsible  head,  or  are  purchases 

made  by  several  different  people?    Obtain  par- 
ticulars. 

(3)  Are  complete  records  made  of  quotations  received? 

(4)  Is  any  accounting  done  in  this  division?     If  so, 

what? 

(5)  Ascertain  filing  methods,  including  filing  of  cata- 

lo^es  and  grice  records. 


EXAMINATION  OF  PLANT 


431 


(6)  Are  any  orders  placed  verbally?     If  so,  are  they 

promptly  confirmed  in  writing? 

(7)  Obtain  copies  of  all  forms  and  books  used. 

(8)  Obtain  list  of  names  of  office  force,  with  duties. 

(9)  Any  additional  information. 

16.  Receiving  Department 

(i)  How  are  incoming  goods  handled? 

(2)  Are  there  any  mechanical  appliances?     Obtain  de- 

scription, 

(3)  What  records  are  maintained? 

(4)  Is  there  a  track  scale  and  a  car  record  kept?     If 

not,  how  are  car  loads  received  and  checked  out  ? 

(5)  How   are  partial   shipments   checked   up   and   re- 

ported ? 

(6)  Is  trucking  equipment  owned?     Of  what  does  it 

consist  ? 

(7)  Obtain  copies  of  forms,  books,  etc. 

(8)  If   any   goods   are   returned,    how    is    accounting 

handled  ? 

(9)  How  are  overs,  shorts,  or  damaged  goods  reported 

to  purchasing  department  ? 
(10)  Any  additional  information. 

17.  Storeroom 

(i)  Are  storerooms  maintained  for  all  raw  materials 
and  parts? 

(2)  How  many  storerooms  are  there,  and  where  lo- 

cated ? 

(3)  Do  many  factory  employees  have  access  tc  stores? 

(4)  Are    heavy    goods    conveniently    arranged    as    to 

classes  and  convenience  of  handling?  Are  they 
properly  marked  or  tagged,  and  are  there  signs 
or  other  methods  for  locating  classes? 


432     THE  INSTALLATION  OF  A  COST  SYSTEM 

(5)  Are  there  any  mechanical  devices  such  as  trolleys, 

tiering  machines,  cars,  etc.  ?     If  so,  obtain  de- 
scription. 

(6)  Are   there  bins,   shelves,   racks,   etc.,   of   sufficient 

capacity,  and  are  they  arranged  to  best  advan- 
tage for  economical  handling  of  goods? 

(7)  Are  bin  cards  used? 

(8)  Are  parts  manufactured  and  carried  in  stock? 

(9)  Could  any  such  parts  be  purchased  for  less  money? 
(10)   Is    raw   material    carried    in   stock   after   passing 

through  a  process?     If  so,  ascertain  reason  and 
obtain  description. 

11)  How  is  the  quality  of  goods  tested  when  received? 

12)  What  checks  are  maintained  as  to  correctness  of 
deliveries  to  manufacturing  departments? 

13)  How  are  such  deliveries  made,  and  are  there  tote 
boxes  or  other  standard  devices  used? 

14)  Are  all  dehveries  covered  by  requisitions?    If  not, 
what  are  the  exceptions  and  reasons  therefor? 

15)  Does  storekeeper  have  copies  of  all  standard  bills 
of  material  or  specifications? 

16)  Are  factory  supplies  furnished  to  departments  on 
requisition?     If  not,  how  are  they  handled? 

17)  Are  obsolete  parts  or  surplus  stock  reported  reg- 
ularly to  the  management? 

18)  How   are   returnable   containers  handled   and   ac- 
counted for? 

19)  How  does  storekeeper  request  purchases? 

20)  Is  a  perpetual  inventory  record  maintained,  and  if 
so,  how  verified? 

(21)  Does  such  inventory  record  show  quantities  only 
or  values  and  costs  as  well? 

(22)  How  many  employees  are  there,  and  what  are  their 
duties  ? 


EXAMINATION  OF  PLANT  433 

(23)  Does    the    department    appear    to    be    efficiently 

handled  ? 

(24)  How  does  storekeeper  handle  excess  materials  is- 

sued and  returned  to  stores? 

(25)  Obtain  copies  of  every  form  or  record. 

(26)  Any  additional  information. 

18.  Labor  and  Labor  Reports  in  Use 

The  number  of  men  occupied  in  productive  and  non-pro- 
ductive work  should  be  recorded  for  each  department  of  the 
plant,  and  the  entire  labor  force  should  be  classified  as  to  the 
operations  and  different  processes  if  it  is  possible  to  do  so. 
The  various  systems  of  paying  wages  should  be  fully  described 
in  connection  with  the  different  products  manufactured. 

Most  of  the  information  in  regard  to  the  labor  cost  will 
be  obtained  in  answer  to  questions  relating  to  the  different 
manufacturing  departments. 

(i)   Obtain  a  copy  of  each  report  in  use. 

(2)  What  is  method  of  recording  labor  information, 

what  use  is  made  of  it,  and  what  is  the  final  dis- 
position of  information  and  detailed  reports. 

(3)  Ascertain  method  of  preparing  pay-roll  and  obtain 

a  copy. 

(4)  What  is  method  of  paying  wages  to  employees? 

Obtain  copy  of  the  receipt  form,  if  same  is  re- 
quired  from  employees. 

(5)  Obtain  full  information  as  to  method  of  preparing 

pay-roll  analysis. 

(6)  Procure  names  of  the  clerks  in  the  pay-roll  depart- 

ment and  ascertain  the  duties  of  each. 

(7)  Obtain  full  description  of  the  method  of  checking 

the  work  in  the  pay-roll  department  as  well  as 
the  check  as  to  the  system  of  paying  wages. 

(8)  Any  additional  information. 


434 


THE  INSTALLATION  OF  A  COST  SYSTEM 


19.  Factory  Overhead  Items 

Provision  should  be  made  for  classifying  all  factory  over- 
head items  so  that  as  many  as  possible  may  be  applied  directly 
to  some  definite  department.  The  basis  of  apportioning  each 
such  item  should  be  fully  described. 

Much  of  the  data  relative  to  the  amounts  composing  the 
factory  overhead  may  be  obtained  from  the  accounts  kept  in 
the  general  and  factory  ledgers.  If  an  analysis  of  detailed 
overhead  items  is  not  complete  enough,  any  suggested  changes 
should  be  discussed  with  the  management  and  head  of  the 
accounting  department.  Where  the  accounts  are  well  ar- 
ranged, they  may  present  valuable  overhead  information  which 
would  otherwise  have  to  be  determined  by  estimate  or  experi- 
ment. 

In  establishing  the  methods  of  distributing  factory  over- 
head, detailed  information  is  necessary  for  ascertaining  the 
various  percentages  and  rates. 

( 1 )  Obtain  a  list  of  all  factory  overhead  items. 

(2)  Ascertain  the  relation  of  each  item  to  the  various 

departments  of  the  plant  and  various  products 
manufactured. 

(3)  Obtain  full  description  of  the  method  which  is  now 

in  use  for  distributing  the  factory  overhead  items 
to  the  various  departments  of  the  plant. 

(4)  Ascertain  the  method  of  applying  the  factory  over- 

head to  the  cost  of  the  job,  order,  article,  or 
process. 

(5)  Obtain  description  of  the  method  of  providing  for 

overhead  when  preparing  estimates  for  new  busi- 
ness. 

(6)  Obtain  copies  of  all  forms  relating  to  factory  over- 

head items. 

(7)  Any  additional  information. 


EXAMINATION   OF   PLANT 


435 


20.  Production 

The  production  will  also  be  considered  as  each  depart- 
ment is  examined.  The  classification  of  the  product  and  the 
classification  of  the  factory  orders  will  indicate  the  kind  of 
work  done  by  the  different  departments.  In  considering  pro- 
duction, the  following  information  is  desirable : 

(i)  Obtain  full  information  as  to  the  method  of  re- 
porting production  to  the  office  and  cost  depart- 
ment. 

(2)  Ascertain  the  method  of  transferring  production  to 

the  various  stock-rooms. 

(3)  Ascertain  the  method  of  checking  the  production 

information  as  reported  by  the  manufacturing  de- 
partments. 

(4)  What  is  the  relation,  if  any,  between  the  produc- 

tion and  the  packing  and  shipping  department  in- 
formation ? 

(5)  Ascertain  how  special  production  is  handled,  if  it 

is  treated  differently  from  the  standard  product 
manufactured. 

(6)  Obtain  copies  of  all  production  forms  and  descrip- 

tion of  the  use  of  each. 

(7)  Any  additional   information. 

21,  Finished  Parts  and  Finished  Stock 

The  questions  dealing  with  the  raw  material  storerooms 
apply  also  to  the  requirements  as  to  the  finished  stock  and 
finished-parts  stock  items. 

(i)  List  the  various  stock-rooms  and  the  location  of 
each. 

(2)  How  is  the  product  placed  in  stock  and  how  is  it 

requisitioned  from  stock? 

(3)  Ascertain  the  relation  of  the  stock-rooms  to  the 


436  THE  INSTALLATION   OF  A  COST   SYSTEM 

operating  departments  of  the  plant  as  shown  by 

the  production  reports. 
(4)  Ascertain  the  relation  of  the  stock-rooms  to  the 

packing  or  shipping  departments  as  shown  by  the 

shipping  records. 
( 5  )  Obtain  full  description  of  the  method  of  keeping  bin 

records  if  same  are  in  use. 

(6)  Ascertain  how  stock  transfers  are  made. 

(7)  What  are  the  requirements  as  to  obsolete  stock 

items  ? 

(8)  Obtain  complete  description  of  stock  records,  and  if 

values  are  entered,  description  of  the  method  of 
costing  the  various  items  upon  the  records. 

(9)  Obtain  copies  of  all  forms. 
(10)  Any  additional  information. 

22.  Compiling  the  Costs 

(i)  Ascertain  the  method  of  transferring  information 
as  to  the  material  cost  from  the  detailed  material 
reports. 

(2)  Ascertain  the  method  of  transferring  information 

as  to  labor  costs  from  the  detailed  labor  reports. 

(3)  Ascertain  the  method  for  providing  for  overhead 

cost. 

(4)  Ascertain  the  method  of  keeping  track  of  the  pro- 

duction reported  for  each  factory  order. 

(5)  What  is  the  method  of  checking,  comparing,  and 

verifying  costs  as  compiled  upon  the  cost  sheet 
or  other  cost  record. 

(6)  Obtain  copy  of  cost  sheet  or  other  cost  records  and 

ascertain  purpose  for  which  each  record  is  used. 

(7)  Obtain  copies  of  all  process  cost  records. 

(8)  Obtain  copies  of  all  cost  records  which  are  compiled 

as  a  basis  for  setting  rates  or  standardizing  costs. 


EXAMINATION  OF  PLANT  437 

(9)  Obtain  copies  of  all  other  cost  forms  with  descrip- 
tion of  the  use  of  each. 
(10)   Any  additional  information. 

23.  Cost  Summarizing  Records 

Secure  full  description  of  summary  records  dealing  with : 

(1)  Charges  for  material. 

(2)  Labor  charges,  both  productive  and  non-productive. 

(3)  Charges  for  factory  overhead  items. 

(4)  Transfers  of  material. 

(5)  Transfers  of  labor. 

(6)  Distribution  of  the  factory  overhead  to  the  various 

departments  of  the  plant. 

(7)  Miscellaneous   adjusting   entries.      (All   adjusting 

entries  should  also  be  fully  described,  and  it  may 
be  necessary  to  make  an  examination  of  several 
months'  transactions  which  show  adjustments.) 

(8)  Methods  of  reporting  production. 

(9)  Shipments  of  merchandise. 

(10)  Return  of  merchandise  to  stock. 

(11)  Obtain  copies  of  all  forms  and  complete  description 

of  the  use  of  each  form  not  dealt  with  in  the  pre- 
ceding queries. 

(12)  Any  additional  information. 

24.  General  Accounting  Records  of  Original  Entry 

(i)  Obtain  copies  of  all  general  accounting  records 
which  have  not  been  considered  previously,  with 
descriptions  of  their  use. 

(2)  Ascertain  the  connection  of  each  record  with  the 

cost  summarizing  records. 

(3)  Ascertain  the  name  and  all  the  duties  of  the  clerk 

keeping  each  record. 

(4)  Any  additional  information. 


438  THE  INSTALLATION   OF  A   COST   SYSTEM 

25.  General  System  of  Accounting 

( 1 )  Obtain  a  complete  list  of  all  private  ledger,  general 

ledger,  and  factory  ledger  accounts. 

(2)  Obtain  full  description  of  any  system  of  symbols 

or  account  numbers  in  use. 

(3)  Ascertain  the  duties  of  the  clerks  who  keep  the 

private,  general,  and  factory  ledger  accounts. 

(4)  Ascertain  the  method  of  preparing  trial  balances 

and  balancing  them  with  subsidiary  supporting 
ledgers  and  records. 

(5)  Obtain  information  regarding  the  method  of  check- 

ing the  valuations  of  plant  assets. 

(6)  Obtain  the  viewpoint  of  the  management  in  regard 

to    the    contemplated    changes    in    the    ledger 
accounts. 

(7)  Obtain  copies  of  forms  of  accounts,  noting  if  any 

accounts  are  of  a  special  form.     Obtain  descrip- 
tion of  those  of  a  special  character. 

(8)  Any  additional  information. 

26.  Statements 

(i)  Obtain  the  list  of  the  financial  and  factory  state- 
ments which  are  prepared  at  the  end  of  a  fiscal 
period.  If  possible,  obtain  a  copy  of  these  state- 
ments showing  the  financial  condition  and  results. 

(2)  Obtain  copies  of  the  factory  and  financial  state- 

ments prepared  at  different  times  during  the  fiscal 
year. 

(3)  Ascertain  fully  the  method  of  preparing  each  state- 

ment, and  the  source  of  its  information. 

(4)  Ascertain  the  duties  of  all  clerks  who  prepare  state- 

ments which  are  submitted  to  the  management. 

(5)  Ascertain  fully  the  purpose  for  which  the  state- 

ments are  used. 


EXAMINATION  OF  PLANT 


439 


(6)  Obtain  the  opinion  of  the  management  as  to  what 

additional  statements  might  be  desirable. 

(7)  Any  additional  information. 

27.  Miscellaneous  Information 

While  the  preceding  queries  and  suggestions  cover  the 
information  required  for  use  in  the  installation  of  complete 
cost  accounting  methods,  it  is  often  desirable  in  the  interest 
of  efficiency  to  obtain  further  details  as  to  the  work  of  the  or- 
ganization. For  example,  it  may  be  discovered  that  some  of 
the  general  clerks  are  able  to  handle  certain  cost  work  in 
addition  to  their  regular  duties.  Therefore,  the  investigation 
should  cover  the  following  general  office  and  accounting  work : 

( 1 )  Method  of  handling  mail  and  correspondence. 

(2)  Method  of  handling  and  controlling  postage  stamps. 

(3)  Filing  system  in  use. 

(4)  Card  index  system  and  method  of  handling. 

(5)  Divisions  of  the  administrative  organizations  and 

number  of  employees  in  each. 

(6)  Description  of  any  forms  or  records  which  have 

not  been  already  considered. 

(7)  Billing  system  in  use  and  method  of  preparing  in- 

voices for  customers. 

(8)  Collection  methods  in  use  and  description  of  rec- 

ords. 

(9)  Stationery    records    and    condition    of    stationery 

stock. 

(10)  List  of  all  forms  which  are  not  being  actually  used 

at  the  time  the  examination  is  made. 

(11)  Method  of  using  each  of  the  forms  which  have 

become  obsolete. 

(12)  Standard  of  clerical  work  and  whether  there  is  any 

provision  made  for  keeping  work  up  to  date. 


440  THE  INSTALLATION  OF  A  COST   SYSTEM 

( 13  )   Objections  offered  against  introduction  of  improved 
accounting  and  efficiency  methods. 

(14)  Method  of  handling  experimental  work. 

(15)  Method  of  guarding  against  strikes  or  other  labor 

troubles. 

(16)  Method  of  taking  inventory  at  such  time  as  finan- 

cial records  are  closed.  This  should  include  a 
full  description  of  the  method  of  counting,  listing, 
and  obtaining  an  inventory,  together  with  the 
method  of  pricing  the  raw  material,  work  in 
process,  finished-parts,  and  finished  stock  items. 

(17)  Method  of  making  inventory  tests,  if  any  are  made 

during  the  fiscal  year. 

(18)  Method  of  adjusting  accounts  and  records  if  the 

test  shows  discrepancies  in  inventory  items. 

(19)  Method  of  recording  cash  sales,  obtaining  copies 

of  all  records  which  should  show  this  informa- 
tion. 

(20)  Method  of  treating  small  orders  received  from  va- 

rious customers  and  how  same  are  billed  if  they 
are  treated  specially. 

(21)  Method  of  recording  the  information  as  to  cash 

purchases,  obtaining  copies  of  records  relating 
to  same. 

Examination  of  Auxiliary  Mechanisms 

Besides  the  examination  of  the  regular  machinery  used  in 
the  manufacture  of  the  product,  attention  should  be  directed 
to  auxiliary  mechanical  service,  which  is  a  very  important 
factor  in  running  a  shop  to  the  best  advantage.  This  field  cov- 
ers a  wide  range,  but  the  following  are  suggested  :  time  clocks, 
time  stamps,  patent  time  cards,  carrying  belts,  automatic  coun- 
ters, arrangements  of  yard  service,  factory  telephones,  standard 
jigs  and  dies,  special  arrangement  for  heavy  or  peculiar  tools, 


EXAMINATION  OF  PLANT 


441 


mechanical  devices  in  the  office,  such  as  adding  machines,  mul- 
tiplying machines,  slide  rules,  sorting  machines,  pay-roll  ma- 
chines, tabulating  machines,  etc. 

Method  of  Obtaining  Information 

It  is  apparent  that  the  information  to  be  gathered  by  the 
examination  outlined  depends  to  a  large  extent  upon  the  size 
of  the  business,  and  that  it  should  be  obtained  only  as  fast 
as  it  can  be  digested  and  analyzed.  A  satisfactory  plan  is 
for  the  examiner  to  spend  the  forenoon  of  the  day  in  examining 
one  or  more  departments  and  their  records  and  in  making 
the  necessary  notes  as  the  answers  to  queries  are  received. 
The  afternoon  of  the  day  may  be  utilized  in  writing  up  in  de- 
tail the  results  of  the  morning's  work.  Thus,  it  is  possible 
to  review  the  work  done  in  the  forenoon  while  the  details  are 
still  fresh  in  mind  and  to  add  any  information  that  may  have 
been  overlooked  in  the  first  place.  In  providing  for  changes 
or  new  systems,  so  far  as  is  practicable  the  existing  methods 
should  be  incorporated  in  the  new  and  the  work  thus  planned 
along  the  lines  of  least  resistance.  Often  one  or  two  changes 
in  a  form  in  current  use,  or  in  its  headings,  or  an  extra  column 
or  two,  will  furnish  a  basis  for  supplying  additional  infor- 
mation required  so  that  accurate  cost  data  may  be  gathered. 


CHAPTER  XXVI 

INSTALLING  A  COST  SYSTEM— METHOD  OF 
STARTING  OPERATIONS 

Preliminary  Test  of  Records 

No  general  statement  would  cover  the  various  matters 
which  should  receive  first  attention  when  a  cost  system  is  being 
installed.  The  exact  starting  point  will  depend,  to  a  large  ex- 
tent, upon  the  kind  of  industry  and  the  manufacturing  condi- 
tions peculiar  to  the  business  under  consideration.  In  general, 
however,  it  may  be  said  that  the  forms,  records,  and  methods 
to  be  used  should  all  be  prepared  and  tested  before  the  date 
when  actual  cost  compiling  begins.  For  example,  the  records 
may  be  used  by  the  factory  and  office  employees  for  a  period 
of  a  week  or  two  merely  with  the  object  of  "trying  them 
out,"  which  would  enable  the  personnel  to  become  thoroughly 
familiar  with  the  method  of  keeping  each  form  and  record 
and  the  method  of  reporting  the  information.  This  is  par- 
ticularly important  in  so  far  as  concerns  the  detailed  material, 
labor,  and  production  reports,  as  these  records  originate  in 
the  factory  and  are  prepared  in  part  or  in  whole  by  factory 
employees  who  may  be  unused  to  clerical  work  of  this  kind. 
The  methods  of  summarizing  the  various  items  of  cost  may  be 
postponed  until  the  actual  reports  begin  to  come  in  from  the 
factory  departments,  which  is  always  a  day  or  two  after  the 
cost  system  is  started. 

Full  and  complete  instructions  should  be  given  to  every 
official  and  clerk  in  any  way  concerned  with  the  operation  of 
the  system,  and  these  instructions  should  be  supplemented  by 
copies  of  the  forms  and  records  which  each  person  is  re- 

442 


METHOD  OF   STARTING  OPERATIONS 


443 


quired  to  handle.  All  differences  of  opinion  and  doubts  in  the 
minds  of  the  executives  and  clerks  responsible  for  the  system 
should  be  properly  adjusted  before  the  actual  cost  work  be- 
gins. It  is  true  that  time  may  not  in  all  cases  permit  extensive 
preparation,  but  in  a  large  number  of  instances,  when  a  cost 
system  is  installed  in  a  hurry,  it  fails  to  work  satisfactorily 
and  is  in  consequence  condemned  before  it  has  been  given  a  fair 
trial.  Lack  of  preparation,  and  a  lack  of  knowledge  of  the 
proposed  methods  on  the  part  of  employees,  are  frequent  causes 
of  its  failure. 

Order  of  Procedure 

Assuming  that  all  necessary  preparatory  work  has  been 
done,  the  next  procedure  is  to  take  up  in  logical  order  the 
steps  necessary  to  get  the  system  working  in  its  full  stride. 
In  summarized  form  these  would  consist  of  the  following 
operations : 

1.  Classifying  and  reanalyzing  the  beginning  inventory. 

2.  Entering  inventory  upon  the  records. 

3.  Starting  new  orders  in  the  factory. 

4.  Overhead  distribution. 

5.  Classification  of  the  product,  departments,  and  ac- 

counts. 

6.  Reports  and  records. 

Classifying  and  Reanalyzing  the  Beginning  Inventory 

If  the  last  physical  inventory  has  been  taken  and  classi- 
fied with  a  view  to  the  installation  of  a  cost  system,  a  re- 
classification or  reanalysis  may  be  unnecessary.  However,  in 
most  instances,  it  will  be  found  that  no  attention  has  been 
given  to  the  matter. .  The  importance  of  an  accurate  physical 
inventory  has  already  been  repeatedly  emphasized.  Cost  ac- 
counting deals  principally  with  keeping  track  of  the  items 
composing  this  inventory,  and  therefore,  being  the  basis  of 


444 


THE  INSTALLATION  OF  A  COST  SYSTEM 


the  whole  system,  too  great  emphasis  cannot  be  laid  upon  the 
fact  that  it  must  be  as  accurate  as  possible. 

The  analysis  of  the  inventory  is  necessary,  as  already 
stated,  so  that  the  various  controlling  accounts  for  raw  ma- 
terial, work  in  process,  finished  parts  stock,  and  finished  stock 
may  be  started  with  the  proper  beginning  balances.  The  de- 
tails which  make  up  these  balances  should  always  prove  and 
be  in  agreement  with  the  total  amount  as  shown  by  the  actual 
physical  inventory. 

The  raw  material  items  are  subdivided  into  different 
classifications  when  separate  controlling  accounts  are  estab- 
lished for  the  various  materials  and  supplies  items  which  com- 
pose this  portion  of  the  inventory.  If  a  separate  controlling 
account  is  kept  for  each  operating  department,  it  is  necessary 
to  reanalyze  the  work  in  process  so  as  to  ascertain  the  costs 
chargeable  to  each  department.  Often  a  proof  is  made  of 
the  elements  of  material,  labor,  and  overhead  charged  to  de- 
partmental work-in-process  accounts,  and  this  proof  may  ne- 
cessitate a  further  subdivision  of  the  details.  The  finished 
parts  stock  items  may  be  controlled  by  several  accounts,  de- 
pending upon  their  classifications.  Therefore,  it  may  be  nec- 
essary to  analyze  these  inventory  items  so  as  to  ascertain  the 
total  amount  applicable  to  each  class  of  finished  parts  on  hand. 
The  same  procedure  is  applicable  to  finished  stock.  Where 
the  inventory  consists  of  several  hundred  sheets  and  no  pre- 
vious attempt  has  been  made  to  classify  the  items,  the  analysis 
will  involve  much  clerical  work,  on  which  it  may  be  necessary 
to  employ  a  special  corps  of  clerks. 

After  the  inventory  has  been  reclassified  and  the  analysis 
proved,  the  controlling  totals  can  then  be  obtained  and  the 
balances  entered  in  the  different  raw  material,  work  in  process, 
finished  parts,  and  finished  stock  accounts.  These,  as  pre- 
viously stated,  may  be  kept  either  on  the  general  ledger  or  in 
a  separate  subsidiary  factory  ledger. 


METHOD  OF  STARTING  OPERATIONS  445 

Entering  Inventory  on  Records 

When  a  complete  cost  system  is  in  operation,  all  control- 
ling accounts  are  supported  by  subsidiary  stores  ledgers  and 
cost  records.  Therefore  it  is  necessary  to  provide  for  entering 
the  detailed  items  of  the  raw  material,  finished  parts  stock, 
and  finished  stock  upon  stores  ledger  accounts  and  the  work 
in  process  items  upon  cost  sheets  or  process  cost  records. 
Frequently  it  is  necessary  to  keep  separate  accounts  for  each 
style,  grade,  size,  and  kind  of  material.  These  stores  ledger 
accounts  should  all  be  started  with  the  quantity  on  hand  as 
shown  by  the  beginning  inventory. 

If  valuations  are  entered  on  the  accounts,  the  price  per 
unit  of  measure  and  total  cost  for  the  quantity  on  hand  must 
be  recorded.  Where  the  raw  material  items  are  controlled 
by  several  controlling  accounts,  the  different  sections  of  the 
stores  ledger  are  classified  accordingly  in  separate  binders,  or 
in  separate  drawers  or  cabinets  if  cards  are  used.  Exactly 
the  same  procedure  is  applied  to  the  classification  and  control 
of  finished  parts  and  finished  stock  or  product. 

Proof  of  Entries 

After  the  entries  have  been  made  upon  the  raw  material, 
finished  parts,  and  finished  stock  stores  ledger  accounts,  a 
proof  should  be  made  of  the  quantity  and  the  amount  entered 
thereon.  This  proof  is  established  by  adding  the  balances 
shown  upon  the  accounts  by  means  of  an  adding  machine  and 
proving  it  with  the  analysis  of  the  merchandise  inventory  for 
each  section,  this  analysis  being  in  agreement  with  the  sum- 
mary of  the  merchandise  inventory. 

While  the  stores  ledger  accounts  in  the  subsidiary  ledger 
constitute  the  main  office  records,  bin  records  may  be  kept  in 
addition  to  these.  Where  this  is  done  the  quantities  shown 
upon  the  stores  ledger  accounts  must  also  be  entered  upon  the 
detailed  bin  records  for  each  item  composing  the  raw  material, 


446  THE  INSTALLATION  OF  A  COST  SYSTEM 

finished  parts  stock,  and  finished  stock  items.  A  proof  should 
be  made  of  the  bin  records  by  comparing  the  information 
shown  thereon  with  that  shown  on  the  stores  ledger  accounts. 

Handling  Work  in  Process  Items 

In  handling  the  work  in  process  items,  if  the  order  method 
of  cost-finding  is  used,  every  job  in  process  at  an  inventory 
date  should  be  given  a  definite  number.  A  cost  sheet  should 
then  be  started  for  each  job,  and  its  total  cost,  as  shown  by  the 
analysis  of  the  merchandise  inventory,  should  be  entered  upon 
its  cost  sheet.  A  proof  should  be  made  by  adding  the  details 
shown  upon  the  cost  sheets  and  comparing  the  totals  with  the 
balances  in  the  various  work  in  process  controlling  accounts. 

Where  the  process  method  of  cost-finding  is  used,  all 
articles  in  the  operating  departments  should  be  grouped,  first, 
according  to  the  classification  of  the  product,  and  secondly, 
according  to  stages  of  completion.  Provision  must  be  made  for 
checking  the  total  cost  of  this  work  in  process  from  inventory 
date  until  it  is  finally  completed.  This  may  be  done  in  two 
ways.  One  method  is  to  enter  an  order  for  each  kind  of 
product  or  article  in  process  in  the  various  departments  and 
follow  the  orders  through  as  under  the  order  method  until 
completed.  Another  method  is  to  convert  the  work  in  process 
at  inventory  date  into  raw  material  or  finished  parts  stock, 
analyzing  upon  process  cost  records  the  material  and  labor 
costs  in  each  case. 

If  cumulative  costs  are  to  be  transferred  from  depart- 
ment to  department,  they  may  be  summarized  and  entered  upon 
various  departmental  cost  records  without  the  necessity  of 
entering  any  details  upon  separate  process  cost  records. 

Starting  New  Orders  in  the  Factory 

All  items  composing  the  merchandise  inventory  should 
be  entered  upon  various  subsidiary  records  which  are  con- 


METHOD   OF  STARTING  OPERATIONS  447 

trolled  by  the  factory  accounts  kept  in  either  the  general  or 
factory  ledger.  The  work  in  process  at  inventory  date  should 
be  definitely  designated  so  that  the  detailed  reports  will  cover 
all  items  of  uncompleted  product.  Provision  must  also  be 
made  for  definitely  designating  the  new  orders  to  be  started. 

The  required  number  of  order  copies  should  be  deter- 
mined during  the  preliminary  discussion  prior  to  the  date  of 
starting  the  cost  system.  If  the  order  method  is  to  be  used, 
all  work  must  be  definitely  designated  by  distinctive  factory 
order  numbers  or  job  numbers.  If  the  process  method  is  em- 
ployed, the  product  should  be  distinguished  by  names  or  num- 
bers allotted  to  the  different  lots  or  batches  and  to  each  opera- 
tion or  process. 

Cost  sheets  should  be  prepared  for  each  job,  order,  ar- 
ticle, or  process,  distinguished  under  the  order  method  by  the 
job  or  order  number,  and  under  the  process  method  by  the 
names  or  numbers  of  the  processes  or  operations.  Each  day, 
as  the  material,  labor,  and  production  reports  are  received, 
the  information  contained  on  them  is  transferred  to  the  cost 
sheets,  process  cost  records,  or  other  cost  records.  The  post- 
ing of  these  records  covers  a  large  part  of  cost  accounting 
procedure.  The  detailed  reports  should  be  summarized, 
proved,  and  analyzed  as  to  the  charges  and  credits  for  the 
various  accounts  affected. 

Overhead  Distribution 

In  cases  where  cost  methods  are  being  adopted  for  the 
first  time,  fixed  rates  or  percentages  for  the  distribution  of 
factory  overhead  usually  will  not  have  been  considered  or 
determined.  Assuming  that  the  precise  methods  to  be  used 
have  been  decided  upon  during  the  preliminary  conference 
preceding  the  installation  of  the  cost  system,  it  will  then  be 
necessary  to  obtain  certain  data  from  the  accounting  records 
of  previous  periods  before  departmental  rates  or  percentages 


448     THE  INSTALLATION  OF  A  COST  SYSTEM 

can  be  compiled.  This  work  often  involves  a  thorough  ex- 
amination and  analysis  of  the  accounts,  which  should  be 
proved  with  the  prior  financial  statements  and  trial  balances. 
After  proving  the  results,  it  is  advisable  to  consider  any 
possible  increases  in  overhead  which  may  occur  during  the 
new  period.  For  example,  the  foremen  may  receive  an  in- 
crease in  wages,  or  the  renting  of  additional  space  may  be  con- 
templated, or  a  cost  department  and  corps  of  inspectors  may 
increase  the  overhead.  All  items  which  would  afifect  the  over- 
head percentages  for  future  periods  should  be  considered  be- 
fore current  rates  or  percentages  are  established.  The  method 
of  distribution  should  provide  for  a  proof  of  the  overhead 
percentages  or  rates,  and  the  adjustment  of  discrepancies 
should  be  made  as  soon  as  they  are  discovered. 

Classification  of  Product,  Departments,  and  Accounts 

Although  the  classification  of  the  product,  the  names  of 
the  departments,  and  the  general  and  factory  ledger  accounts 
to  be  opened  should  be  determined  and  any  difference  of  opin- 
ion adjusted  before  the  new  methods  are  put  into  operation, 
it  will  often  be  found  necessary  to  make  changes  in  these  mat- 
ters after  the  cost  system  is  started.  These  changes  should 
be  considered  as  promptly  as  possible  and  adopted,  if  neces- 
sary, without  delay. 

Reports  and  Records 

Assuming  that  the  factory  records  have  been  given  a  pre- 
liminary trial  and  that  the  employees  are  thoroughly  familiar 
with  their  nature  and  purpose,  attention  must  then  be  given 
to  the  method  of  summarizing  the  reports  and  familiarizing 
the  personnel  with  the  procedure  involved.  This  work  should 
also  be  done,  if  possible,  during  the  preliminary  period.  Af- 
ter the  summaries  are  prepared,  the  posting  of  the  information 
to  the  ledger  accounts  will  be  in  order. 


METHOD   OF   STARTING  OPERATIONS 


449 


Trial  balances  should  be  prepared  to  prove  the  mathe- 
matical accuracy  of  the  subsidiary  stores  ledgers  and  cost  rec- 
ords. Statements  should  then  be  made  out  before  any  adjust- 
ments are  considered,  for  the  reason  that  discrepancies  are 
often  brought  to  light  in  a  statement  that  would  otherwise 
be  unnoticed.  During  the  first  few  periods,  a  cost  system  may 
not  operate  as  smoothly  as  it  will  later  when  necessary  adjust- 
ments have  been  made.  No  discouragement  need  be  felt  if 
these  adjustments  are  required,  because  lack  of  proper  infor- 
mation or  the  overlooking  of  certain  details  may  have  caused 
them.  Of  course,  every  effort  should  be  made  to  reduce  all 
discrepancies  to  a  minimum,  so  that  the  reports  and  records 
may  serve  their  true  function  of  indicating  inefficiencies  in 
the  factory  operation  and  in  the  organization. 


Part  VI — Simplified  Cost-Finding  Methods 


CHAPTER  XXVII 

ELEMENTARY  COST  SYSTEMS 

Valuation  of  Closing  Inventory 

One  of  the  advantages  of  operating  a  perpetual  inventory, 
as  previously  pointed  out,  is  that  it  enables  a  balance  sheet  with 
a  supporting  manufacturing  profit  and  loss  statement  or  a 
trading  and  profit  and  loss  statement  to  be  prepared  at  the  end 
of  each  cost  period  without  the  necessity  of  making  a  count 
and  valuation  of  the  items  of  stock  and  merchandise  on  hand. 
In  many  mercantile  houses  and  in  some  manufacturing  busi- 
nesses a  perpetual  inventory  is  not  maintained  either  because 
of  the  multiplicity  of  the  lines  handled  or  because  of  the  small 
intrinsic  value  of  the  product.  Under  these  conditions,  if  the 
{)roduct  or  lines  sold  are  homogeneous  and  the  average  gross 
profit  made  on  all  lines  can  be  determined  with  fair  accuracy, 
the  value  of  the  closing  inventory  may  be  ascertained  in  the 
following  simple  way :  Determine  first  the  cost  of  sales  for 
the  month  by  deducting  from  the  sales  the  percentage  of  gross 
profit.  Thus,  if  sales  for  the  period  are  $i,ooo  and  the  gross 
profit  on  them  is  50%,  the  cost  of  sales  figure  is  $500.  Then 
from  the  total  charges  for  the  month  deduct  the  cost  of  sales. 
The  remainder  represents  the  value  of  the  closing  inventory. 

It  may  be  noted  that  the  cost  of  sales  can  only  be  accu- 
rately determined  in  this  way  when  material  and  labor  costs 
are  either  more  or  less  fixed  or  when  fluctuations  in  these  items 
are  reflected  in  the  selling  price.  In  other  words,  any  increase 
or  decrease  in  the  items  of  cost  must  show  a  corresponding  in- 
crease or  decrease  in  the  selling  prices.     Where  this  is  true 

451 


452  SIMPLIFIED    COST-FINDING    METHODS 

and  the  industry  earns  a  fixed  percentage  of  gross  profit,  finan- 
cial statements  may  be  prepared  at  the  end  of  any  period. 

Method  of  Preparing  Statements 

The  method  of  preparing  statements  may  be  concisely 
illustrated  by  using  the  trial  balance  presented  in  Chapter  XIX, 
which  at  the  end  of  the  first  period  was  as  follows : 

The  Brown  Manufacturing  Company 

General  Ledger  Trial  Balance 
January  31,   1918 

1  Cash  $  39,700.00 

2  Accounts  Receivable 159,000.00 

3  Notes  Receivable 15,000.00 

4  Merchandise       Inventory       (balance, 

January  i )    226,700.00 

5  Machinery  and  Fixtures  35,000.00 

6  Notes  Payable  $  15,000.00 

7  Accounts  Payable  64,000.00 

8  Pay-Roll 

9  Capital  Stock  350,000.00 

10  Surplus    54,700.00 

11  Sales  85,000.00 

12  Merchandise  Purchases  59,000.00 

13  Productive  Labor   18,000.00 

14  Factory  Indirect  Expense 7,000.00 

15  Selling  Expenses 5,800.00 

16  Administrative  Expenses   3,500.00 

$568,700.00    $568,700.00 

If  an  examination  of  the  financial  statements  covering 
several  previous  periods  shows  that  the  gross  profit  averages 
30%  of  the  sales,  it  is  obvious  that  70%  of  the  sales  constitutes 
their  manufacturing  cost.  In  the  above  example  sales  amount 
to  $85,000.  Thirty  per  cent  of  this  amount  represents  the  gross 
profit  of  $25,500,  and  70%,  or  $59,500,  represents  the  cost 
of  the  sales.  From  these  facts,  a  statement  may  be  prepared 
showing  the  value  of  the  closing  merchandise  inventory. 


ELEMENTARY  COST  SYSTEMS 


453 


Schedule  Showing  Merchandise  Inventory 
January  31,  1918 

Merchandise  Inventory,  January  i,  1918 $226,700.00 

Charges  for  January,  1918: 

Merchandise  Purchases  $59,000.00 

Productive  Labor   18,000.00 

Factory  Indirect  Expenses  7,000.00 


Total  Charges  for  the  Month 


84,000.00 


Total $310,700.00 

Credits  for  January,  1918: 
Cost  of  Sales  (70%  of  $85,000) 59,500.00 

Merchandise  Inventory,  January  31,   1918 $251,200.00 

With  the  cost  of  sales  and  the  value  of  the  closing  inven- 
tory determined,  financial  statements  may  then  be  prepared. 

The  Brown  Manufacturing  Company 

Estimated  Statement  of  Assets  and  Liabilities 

January  31,  1918 


Assets 

Cash  $  39,700.00 

Accounts   Receivable.   159,000.00 

Notes  Receivable 15,000.00 

Merchandise      Inven- 
tory (estimated) . . .  251,200.00 
Machinery    and    Fix- 
tures       35,000.00 


Total  Assets $499,900.00 


Liabilities 

Notes  Payable $  15,000.00 

Accounts  Payable  . . .     64,000.00 


Total    Liabilities $  79,000.00 

Capital  Stock 350,000.00 

Surplus    54,700.00 

Estimated  Net  Profit.     16,200.00 


Total    Liabilities    and 
Capital  $499,900.00 


The  Brown  Manufacturing  Company 

Estimated  Manufacturing  and  Profit  and  Loss 

Statement 

For  the  Month  of  January,  19 18 

Sales $85,000.00 

Cost  of  Sales: 
Merchandise  Inventory,  January  i,  1918. .     $226,700.00 
Merchandise  Purchases  59,000.00 


454  SIMPLIFIED   COST-FINDING    METHODS 

Productive  Labor  18,000.00 

Factory  Indirect  Expenses 7,000.00 

Total    $310,700.00 

Less  Merchandise  Inventory,  January  31, 

1918    251,200.00 

Total  Cost  of  Sales  (70%)    59,500.00 

Gross  Profit  (30%)   $25,500.00 

Expenses : 

Selling  Expenses  $    5,800.00 

Administrative  Expenses   3,500.00 

Total  Expenses  9,300.00 

Net  Profit $16,200.00 

The  above  statement  is  drawn  up  in  its  simplest  possible 
form,  it  being  understood  that  a  more  detailed  analysis  of  the 
merchandise  purchases,  productive  labor,  factory  indirect  ex- 
penses, selling  expenses,  and  administrative  expenses  may  be 
made,  or  separate  supporting  schedules  may  give  the  detailed 
items  composing  each  of  these  totals. 

In  preparing  the  statement,  the  items  are  taken  directly 
from  the  trial  balance  and  general  ledger  accounts.  Given 
the  average  percentage  of  gross  profit,  the  inventory  may  be 
obtained  from  the  calculations  made  on  the  statement.  After 
the  estimated  valuation  of  the  merchandise  inventory  is  ar- 
rived at  under  this  method,  a  comparison  of  the  estimated 
amount  with  that  of  an  actual  physical  inventory  would  prove 
the  accuracy  of  the  method  and  the  correctness  of  the  per- 
centage figure  used. 

Advantages  of  Percentage  Method 

The  advantage  of  this  plan  lies  in  its  simplicity.  It  elimi- 
nates the  necessity  of  costing  each  separate  invoice  to  a  cus- 
tomer and  also  of  keeping  account  of  the  cost  of  merchandise 
returns.    This  part  of  cost  work  is  burdensome,  as  it  involves 


ELEMENTARY  COST  SYSTEMS  455 

a  considerable  amount  of  detailed  calculations  and  summariz- 
ing, A  further  argument  in  favor  of  the  adoption  of  this 
simple  method  is  that,  if  the  inventory  and  cost  of  sales  figures 
as  shown  by  estimated  statements  prove  to  be  unreliable,  this 
is  one  of  the  best  reasons  for  the  adoption  of  more  complete 
cost-finding  methods.  A  cost  system,  in  whole  or  in  part,  is 
often  installed  if  statements  based  on  estimates  can  be  shown 
to  be  an  ineffective  check  upon  the  operations  of  the  business. 

Percentage  Method  Applied  to  Several  Product  Classifications 

Where  different  kinds  of  articles  are  sold,  separate  de- 
partments may  be  established  for  each  product  classification. 
The  percentage  of  gross  profit  and  of  cost  of  sales  may  then 
be  ascertained  for  each  department  and  the  statement  devel- 
oped to  show  the  inventory  valuation  of  each  kind  of  article 
or  product.  When  this  is  done,  records  are  required  to  show : 
( I )  the  transfer  of  any  merchandise  and  labor  items  from  one 
department  to  another,  and  (2)  the  material  and  supplies 
requisitioned,  to  be  charged  to  departmental  accounts. 

Where  several  departments  are  established,  it  is  well  to 
provide  a  complete  chart  of  accounts  and  analysis  records  so 
that  the  charges  and  credits  affecting  each  department  account 
may  be  correctly  ascertained,  for  which  purpose  some  of  the 
cost  summarizing  records  described  in  Chapters  XVI,  XVII, 
and  XVIII  may  be  used  to  advantage. 

Unit  Method  of  Figuring  Costs 

Where  only  one  or  a  few  kinds  of  product  are  handled, 
such  as  in  the  case  of  an  ice  manufacturing  plant,  or  a  dealer 
in  coal  and  firewood,  costs  can  be  readily  obtained  if  stock 
records  are  kept  showing  the  quantities  or  units  of  merchan- 
dise on  hand  at  the  beginning  of  the  period,  the  quantities 
purchased  or  manufactured,  and  the  quantities  sold.  Assum- 
ing that  the  ledger  accounts  show  the  amount  of  materials  and 


4S6  SIMPLIFIED    COST-FINDING   METHODS 

supplies  used,  wages  paid  for  productive  labor,  and  the  indi- 
rect expenses,  the  average  cost  per  ton,  pound,  barrel,  cord, 
or  any  other  unit  may  be  obtained  by  dividing  the  number  of 
units  produced  or  purchased  during  the  period  into  the  total 
costs  for  the  same  period.  When  this  plan  is  used,  it  is  un- 
necessary to  change  the  method  of  keeping  the  accounts  in  the 
general  ledger.  The  ordinary  financial  accounts  plus  data  as 
to  the  above-mentioned  quantities  or  units  are  all  that  is  re- 
quired to  obtain  the  cost  of  sales  and  thus  figure  the  value 
of  the  closing  inventory  and  prepare  financial  statements. 

The  advantages  of  this  plan  lie  in  its  simplicity,  as  the 
cost  of  sales  is  ascertained  without  the  large  amount  of  de- 
tailed work  involved  in  costing  invoices  separately.  More- 
over, the  plan  often  brings  to  light  discrepancies,  thus  indi- 
rectly proving  the  value  of  more  detailed  methods  when  more 
than  one  line  of  product  is  handled. 

Applicability  of  Unit  Method 

The  unit  method  is  applicable  to  both  mercantile  and  man- 
ufacturing concerns.  It  may  be  used  by  real  estate  concerns 
when  a  large  tract  of  property  is  purchased,  developed,  and 
divided  into  lots  for  sale.  A  record  is  kept  of  the  number 
of  lots  obtained  from  the  tract,  and  this  number  divided  into 
the  cost  of  development  to  date  gives  the  cost  of  sales  on  each 
lot  sold.  Selling  prices  on  various  lots  may  be  established 
from  the  lot  record  in  connection  with  the  development  costs 
of  the  property.  Then  each  lot  sold  may  be  traced  both  as  to 
cost  and  selling  price,  and  a  profit  and  loss  statement,  using 
this  information  as  a  basis,  may  be  prepared. 

The  system  may  also  be  used  in  the  retail  coal  business 
by  keeping  stock  records  of  the  tons  or  other  units  of  each 
kind  of  coal  purchased  and  sold  and  by  determining  the  aver- 
age purchase  price  of  each  unit  as  a  basis  for  calculating  the 
cost  of  sales.    Provision  may  need  to  be  made  for  the  trans- 


ELEMENTARY  COST  SYSTEMS  457 

fers  of  coal  from  one  location  to  another  and  also  for  any  loss 
in  weight.  The  latter  should  be  provided  for  by  means  of  a 
percentage  based  on  past  experience. 

In  wholesale  and  jobbing  industries, .  where  the  product 
sold  is  more  or  less  uniform  in  character  and  where  ample 
stock  records  may  be  provided  for  keeping  track  of  the  quan- 
tities on  hand,  purchased,  and  sold,  these  records  would  form 
the  basis  for  obtaining  the  cost  of  sales  if  the  average  purchase 
price  were  first  determined.  In  small  businesses  the  ledger 
accounts  may  be  ruled  to  show  the  quantities  of  merchandise 
purchased,  produced,  and  sold.  Where  this  is  done,  it  is  not 
necessary  to  keep  a  subsidiary  record  of  stock. 

Thus,  the  unit  method  of  figuring  costs  is  widely  appli- 
cable. The  accuracy  of  the  statements  prepared  in  this  way 
will  depend  upon  the  correctness  of  the  figures  as  to  quantities, 
and  those  as  to  the  average  cost  of  sales.  Where  different 
kinds  of  product  are  handled  and  the  cost  of  sales  cannot  be 
averaged,  sales  must  be  departmentalized  and  provision  made 
for  charging  the  material,  labor,  and  indirect  expenses  to  the 
various  departments.  Where  departments  are  established,  the 
accounts  should  be  classified  so  that  the  charges  and  credits  in 
each  case  may  be  accurately  made. 

Proof  of  Records 

Where  the  preparation  of  financial  statements  is  based 
on  the  number  of  units  sold,  it  is  necessary  to  prove  the  quan- 
tities entered  upon  the  stock  records  or  upon  such  records  as 
are  used  to  obtain  the  cost  of  sales.  These  figures  should 
agree  at  the  end  of  each  period  with  the  quantity  reported 
sold  as  shown  by  the  sales  record.  The  quantity  of  merchan- 
dise returned  must  also  be  deducted  from  the  quantity  shipped 
before  the  cost  of  sales  can  be  ascertained. 

The  value  of  the  periodical  statements  will  depend,  to  a 
large  extent,  upon  the  accuracy  of  the  quantities  obtained  from 


458  SIMPLIFIED    COST-FINDING    METHODS 

the  detailed  records.  Proof  of  this  portion  of  the  work  can 
only  be  made  at  such  times  as  an  actual  physical  inventory  is 
taken.  Where  the  business  is  well  departmentalized  and  com- 
plete stock  records  are  kept,  it  is  often  possible  to  make  tests 
of  different  items  composing  the  merchandise  inventory  at 
different  times  during  the  year.  When  these  tests  are  made, 
any  differences  should  be  adjusted  before  the  financial  state- 
ments are  prepared  at  the  end  of  the  period. 


CHAPTER  XXVIII 

ESTIMATING  COST  SYSTEMS 

Special  Features  of  Estimating  Method 

An  estimating  cost  system  is  one  in  which  the  cost  of  pro- 
duction is  checked  and  controlled  by  means  of  estimates  as  to 
what  the  actual  expenditures  on  certain  articles  or  groups  of 
products  are  expected  to  be.  The  predetermined  estimates  are 
usually  based  on  previous  results  when  the  figures  are  avail- 
able. But  if  the  article  or  group  of  articles  to  be  manufactured 
consists  of  a  new  Hne,  the  estimates  must  be  based  on  the 
opinion  of  the  designer  of  the  product  or  the  factory  superin- 
tendent, foreman,  or  other  experienced  employee. 

When  costs  are  found  and  controlled  by  the  order  or 
process  method  of  cost-finding,  material,  labor,  and  overhead 
figures  are  compiled,  as  the  work  progresses,  on  separate  sets 
of  records  for  every  job,  order,  or  process.  When  costs  are 
controlled  by  means  of  estimates,  the  figures  are  compiled  for 
articles  or  groups  of  different  articles,  the  number  of  the 
records  which  are  necessary  depending  upon  the  analysis  of 
the  cost  elements  and  the  number  of  accounts  established  as  a 
means  for  proving  the  estimates.  The  estimated  costs  are  in- 
corporated in  the  financial  accounts  through  a  simple  system 
of  records,  thereby  establishing  an  accounting  proof  or  check 
on  the  accuracy  of  the  predetermined  figures  on  which  the 
selling  prices  are  based.  If  the  profit  or  loss  on  certain 
articles  or  lines  at  the  end  of  the  year  is  not  satisfactory,  the 
estimates  are  revised  and  the  selling  prices  adjusted  accord- 
ingly. As  will  be  more  clearly  seen  later,  the  purpose  of  the 
estimating  method  is  to  insure  an  adequate  profit  on  the  mer- 
chandise sold  and  to  prove  the  costs  in  detail. 

459 


460  SIMPLIFIED    COST-FINDING    METHODS 

The  advantages  of  controlling  costs  by  estimates  are 
twofold :  First  the  clerical  work  is  much  less  than  that  which  is 
required  to  operate  a  complete  job  order  cost  system  or  process 
cost  system,  as  the  detailed  records  of  material,  labor,  and 
overhead  covering  hundreds  or  even  thousands  of  orders  are 
compressed  into  a  comparatively  small  number  of  records. 
Secondly,  discrepancies  between  the  predetermined  and  actual 
figures  indicate  where  the  estimates  were  at  fault  in  the  first 
instance  and  thus  indicate  in  v/hat  direction  more  detailed 
methods  of  cost-finding  may  advantageously  be  installed. 

Method  of  Operating  System 

In  the  operation  of  all  estimating  cost  systems  the  fac- 
tory receives  credit  for  the  cost  of  the  articles  produced,  which 
articles  are  priced  at  their  estimated  figures.  The  factory  is 
charged  with  the  material,  labor,  and  overhead  expense  inci- 
dental to  the  production  of  the  articles.  Where  the  product 
manufactured  is  of  one  kind  and  the  styles,  sizes,  or  designs 
are  few  in  number,  it  may  be  practicable  to  credit  the  factory 
with  the  total  production  cost.  But  if  the  estimated  total  cost 
credited  to  the  factory  fails  to  agree — when  a  proof  of  total  cost 
is  made — with  the  actual  total  cost  debited,  the  credit,  which 
the  factory  receives  for  work  done,  may  be  divided  into  its 
elements  of  material,  labor,  and  overhead  and  the  estimated 
figures  predetermined  in  the  same  way,  i.e.,  as  to  the  ele- 
ments of  cost.  As  the  factory  is  charged  with  the  elements  of 
material,  labor,  and  overhead  cost  from  distinctive  records, 
the  proof  of  each  of  the  elements  of  cost  may  be  separately 
made. 

In  more  complex  industries  where  various  kinds  of  prod- 
uct are  manufactured,  analysis  records  may  be  kept  for  show- 
ing the  material,  labor,  and  overhead  costs  applicable  to  each 
lot  of  product  or  each  group  of  articles.  When  the  factory  is 
credited  with  the  estimated  cost  of  the  work  done,  these  credits 


ESTIMATING   COST    SYSTEMS  461 

should  also  be  analyzed  into  the  lots  or  groups  into  which  the 
factory  production  is  divided. 

Summary  of  Procedure 

The  various  steps  in  the  operation  of  an  estimated  cost 
system  may  be  summarized  as  follows : 

1.  Estimated  costs  are  predetermined  for  every  article 

manufactured  and  sold.  The  figures  may  show 
the  total  cost  only  or  the  details  of  material,  labor, 
and  overhead. 

2.  The  accounts  showing  the  factory  operations  either 

as  to  the  total  cost  of  the  lot  or  as  to  its  elements 
are  charged  with  the  beginning  inventory  priced 
at  the  estimated  figures  and  the  actual  material, 
labor,  and  overhead  expenses  incurred  during  the 
period. 

3.  The  accounts  showing  the   factory  operations  are 

credited  with  the  total  cost  of  the  articles  produced, 
priced  at  their  estimated  figures.  (The  balance 
of  the  accounts  showing  factory  operations  repre- 
sents the  value  of  the  closing  inventory. ) 
•  4.  A  physical  inventory  is  taken  at  the  end  of  the  period 
and  is  priced  at  the  estimated  figures. 
5.  A  comparison  is  made  between  the  book  inventory  as 
shown  by  the  account  balances  with  the  total 
amount  of  the  inventory  based  upon  an  actual 
physical  stock-taking.  Any  discrepancies  between 
the  two  sets  of  figures  indicate  the  extent  of 
errors  made  in  the  predetermined  estimates. 

Development  of  System 

There  are  several  methods  or,  more  accurately,  stages  of 
development  in  cost-finding  by  means  of  predetermined  esti- 
mates, ranging  in  scope  «^§  follows : 


462  SIMPLIFIED    COST-FINDING    METHODS 

1.  Verification  of  estimated  costs  in  total  amount. 

2.  Verification  of  the  material,  labor,  and  overhead  costs 

in  total. 

3.  Verification  of  estimated  costs  of  the  different  prod- 

ucts manufactured,  provision  being  made  for  prov- 
ing the  estimated  cost  of  each  product  separately. 

4.  Verification  of  estimated  costs  in  the  different  operat- 

ing departments  of  the  plant,  the  estimated  cost 
in  each  being  proved  separately. 

It  is  the  intention  in  this  chapter  to  develop  the  subject 
from  a  simple  method  of  proving  the  estimated  costs  in  total, 
to  a  more  elaborate  system  whereby  details  are  proven.  It 
should  be  clearly  understood  that  the  proof  of  estimated  costs 
can  only  be  made  when  a  physical  inventory  is  taken,  and 
that  the  inventory  must  be  priced  at  the  estimated  costs. 

Verification  of  Total  Costs — First  Method 

Special  Records  Required 

Where  the  estimates  of  the  articles  manufactured  are 
proved  only  as  to  their  total  cost,  the  following  records  are 
required  in  addition  to  the  regular  financial  records :         * 

1.  A  schedule  showing  the  total  estimated  cost  of  each 

article. 

2.  A  record  showing  the  total  estimated  cost  of  the 

articles  produced  and  sold. 

The  schedule  of  estimated  costs  (Form  99)  is  a  columnar- 
ruled  sheet  on  which  are  listed  the  article  or  style  number, 
grade  or  kind,  and  total  estimated  cost  of  each  article.  The 
information  as  to  the  estimated  cost  of  sales  is  entered  upon 
the  sheet  illustrated  in  Form  100,  on  which  the  details  are 
summarized  so  that  the  total  cost  of  all  sales  can  be  ascertained 
at  the  end  of  the  month. 


ESTIMATING   COST   SYSTEMS 


463 


SCHEDULE  OF  ESTIMATED  COSTS 

For 19 

Article  No. 

OR 

Style  No. 

Grade  or  Kind 

Total 

Estimated 

Cost 

V 

Form  99.    Schedule  of  Total  Estimated  Costs.     (Size,  8x11.) 


ESTIMATED  COST  OF  SALES 

No 

For 19 

Article 

No.  or 

Style  No. 

Quantity 
Sold 

Kind  or  Description 

Estimated 

Unit 
Cost 

Total 
Cost 

Form  100.    Summary  of  Estimated  Cost  of  Sales.     (Size,  8  x  11.) 


464  SIMPLIFIED    COST-FINDING    METHODS 

General  Ledger  Accounts 

For  the  purpose  of  showing  the  difference  (if  any)  be- 
tween the  estimated  costs  and  the  actual  production  cost 
figures,  two  ledger  accounts  are  opened  headed  respectively 
(i)  Cost  of  Sales  account,  and  (2)  Production  Cost,  or 
Estimated  Cost  account.  These  accounts  have  no  connection 
with  the  rest  of  the  ledger  so  far  as  the  detail  of  bookkeeping 
is  concerned.  They  are  operated  solely  for  the  purpose  of 
proving  the  estimated  costs  when  the  actual  physical  inventory 
is  taken. 

The  Cost  of  Sales  account  is  charged  with  the  total  cost 
of  sales  as  obtained  from  the  summary  of  cost  of  sales  (Form 
100),  the  offsetting  credit  being  to  Production  Cost  account. 
Thus  the  debit  balance  of  the  one  is  always  in  agreement  with 
the  credit  balance  of  the  other,  and  the  figures  may  be  elimi- 
nated from  the  general  ledger  without  affecting  the  other  trans- 
actions recorded  therein. 

In  charging  the  details  of  the  inventories  and  the  expendi- 
tures for  the  period  to  their  proper  general  ledger  accounts, 
care  must  be  exercised  to  keep  the  original  classification  un- 
changed; that  is,  the  items  charged  to  material,  labor,  or  in- 
direct expenses  accounts  must  be  the  same  as  those  taken  into 
account  when  making  up  the  schedule  of  estimated  costs.  If 
any  change  in  the  classification  of  expenditures  is  made  after 
the  estimated  costs  are  established,  the  validity  of  the  proof  is 
destroyed. 

Method  of  Verification 

The  sum  total  of  the  items  recorded  in  the  inventory, 
material,  labor,  and  factory  indirect  expense  accounts  include 
all  charges  applicable  to  factory  operations.  Therefore,  when 
the  credit  balance  of  the  Factory  Production  Cost  account  is 
deducted  from  the  total,  the  balance  should  represent  the  value 
of  the  book  inventory,  i.e.,   its  estimated  value.     When  a 


ESTIMATING   COST   SYSTEMS  465 

physical  inventory  is  taken,  and  priced  at  the  figures  of  the 
schedule  of  estimated  costs,  its  total  amount  should  be  in  agree-, 
ment  with  the  book  balance  of  the  inventory  if  the  total  esti- 
mated costs  are  correct.  Any  difference  between  the  two  bal- 
ances is  due  to  inaccuracies  in  the  estimates.  If  the  differ- 
ence is  a  large  one  and  its  cause  cannot  be  located,  it  may  be 
necessary  to  make  the  estimates  in  greater  detail  so  that  the 
origin  of  the  discrepancy  may  be  ascertained  without  much 
trouble. 

Verification  of  Material,  Labor,  and  Overhead 
Estimates — Second  Method 

Special  Records  Required 

When  a  proof  is  required  of  the  estimated  material,  labor, 
and  overhead  cost,  the  article  cost  must  be  separated  into  its 
elements.  To  do  this  Forms  99  and  100  are  ruled  to  show  the 
estimated  material,  labor,  and  overhead  costs  of  the  articles  to 
be  produced  and  are  supplemented  with  a  record  showing  the 
analysis  of  the  inventory,  classified  in  the  same  way.  The 
schedule  of  estimated  costs  and  the  record  of  the  cost  of  sales 
are  operated  in  the  way  already  described.  That  is,  the 
schedule  furnishes  the  figures  for  pricing  the  cost  of  sales  as  to 
the  material,  labor,  and  overhead  cost  of  each  article  sold. 
The  total  material,  labor,  and  overhead  cost  of  the  sales  are 
then  credited  to  the  ledger  accounts,  which  are  discussed  in 
later  sections. 

Analysis  of  Inventory 

The  analysis  of  inventory  (Form  lOl)  is  used  to  ascer- 
tain the  estimated  cost  value  of  all  product  in  the  plant,  divided 
into  material,  labor,  and  overhead.  The  ruling  and  headings 
of  this  form  are  exactly  the  same  as  those  on  the  record  of  cost 
of  sales,  excepting  of  course  the  main  heading. 


466  SIMPLIFIED    COST-FINDING    METHODS 

In  making  up  the  inventory  the  cost  of  any  raw  material 
in  stock  is  entered  in  the  material  column.  The  cost  of  any 
articles  in  process  is  estimated  as  accurately  as  possible  as  to 
its  three  elements  which  are  entered  in  their  respective  col- 
umns. Any  errors  in  the  pricing  of  the  work  in  process  at  the 
beginning  of  the  period  will  probably  be  offset  by  the  same 
errors  at  the  end  of  the  period — unless  there  is  a  great  differ- 
ence in  quantities  between  the  opening  and  closing  inventories. 
The  finished  articles  in  stock  are  also  priced  as  to  their  ele- 
ments of  cost  and  entered  in  the  same  way.  The  totals  of  the 
analysis  thus  represent  the  material,  labor,  and  overhead  cost 
of  the  beginning  inventory,  which  totals  are  used  to  open 
three  corresponding  accounts  on  the  ledger. 

Operation  of  Ledger  Accounts 

The  Raw  Material,  Productive  Labor,  and  Factory  Over- 
head accounts  already  mentioned  take  the  place  of  the  Produc- 
tion Cost  account  used  under  the  first  method.  Instead  of 
entering  the  amount  of  the  merchandise  inventory  in  a  single 
account  on  the  general  ledger,  it  is  split  up  into  its  elements  on 
the  inventory  analysis  and  from  there  posted  to  the  debit  of 
the  three  ledger  accounts  at  the  beginning  of  the  period. 

During  the  period  all  expenditures  for  direct  material 
are  charged  to  Raw  Material  account,  those  for  productive 
labor  to  the  Productive  Labor  account,  while  at  the  end  of 
the  period  Factory  Overhead  account  is  debited  with  the  vari- 
ous indirect  expenses  classified  in  detailed  accounts.  In  mak- 
ing the  charges  care  must  be  taken  to  see  that  their  classifica- 
tion is  the  same  as  that  on  which  the  estimated  costs  are  based. 
If,  for  instance,  certain  items  of  material  are  classed  as  raw 
material  in  making  up  the  estimates,  and  when  consumed  are 
charged  as  supplies  to  an  expense  account,  the  estimated  ma- 
terial will  be  more  than  the  actual  material  cost  by  the  amount 
of  material  charged  as  supplies;  and  the  reverse  holds  in  the 


ESTIMATING  COST   SYSTEMS 


467 


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468  SIMPLIFIED    COST-FINDING    METHODS 

case  of  the  estimated  and  actual  overhead  charges.  Thus  the 
value  of  the  comparison  between  the  predetermined  and  actual 
figures  is  largely  destroyed. 

The  debit  side  of  the  three  above  accounts  shows  the  esti- 
mated cost  value  of  the  inventory  at  the  beginning  of  the 
period,  plus  actual  current  expenditures.  On  the  credit  side 
appears  the  estimated  cost  of  the  articles  sold  during  the 
period.  This  information,  as  under  the  first  method,  is  gath- 
ered on  the  summary  of  cost  of  sales ;  but  as  it  is  to  be  shown 
in  greater  detail,  i.e.,  as  to  its  elements,  the  material,  labor, 
and  overhead  estimated  cost  of  each  sale  is  entered  on  the  sum- 
mary and  the  three  totals  are  then  credited  to  their  respective 
accounts — the  three  credit  postings  being  in  agreement  with 
the  total  posted  to  the  debit  of  the  Cost  of  Sales  account. 

Method  of  Verification 

As  the  balances  of  the  Raw  Material,  Productive  Labor, 
and  Overhead  accounts  represent  the  book  inventory  classified 
in  the  same  way  as  the  beginning  inventory,  it  is  obvious  that 
the  book  inventory  should  be  in  agreement  with  the  physical 
inventory  if  the  estimates  are  correct.  A  physical  inventory 
is  taken  to  verify  the  accuracy  of  the  latter.  Any  difference 
between  the  two  sets  of  inventory  figures  must  be  due  to  in- . 
accuracies  in  the  original  estimates  of  cost,  assuming  that  the 
physical  inventories  taken  at  the  beginning  and  end  of  the 
period  are  accurate.  If  any  element  of  cost  in  the  book  in- 
ventory exceeds  the  corresponding  element  in  the  physical  in- 
ventory, this  indicates  that  the  predetermined  costs  have  been 
underestimated  as  regards  that  particular  element.  If  the 
reverse  is  true,  the  cost  must  have  been  overestimated. 

This  method  of  proving  the  estimates  in  detail  is  a  valu- 
able means  of  disclosing  wastage  of  time,  material,  or  other 
inefficiencies.  If,  for  example,  the  actual  cost  of  material 
proves  to  be  greater  than  the  estimated  cost,  while  it  is  an 


ESTIMATING  COST   SYSTEMS  469 

established  fact  that  the  amount  of  material  used  should  not 
have  exceeded  the  estimated  allowance,  this  is  a  clear  indica- 
tion that  material  must  have  either  been  stolen  or  wasted.  If, 
on  the  other  hand,  there  is  some  doubt  as  to  the  reliability  of 
the  estimated  material  cost,  and  the  actual  cost  proves  the 
estimates  to  have  been  inaccurate,  it  may  be  advisable  to  am- 
plify the  system  by  introducing  material  requisitions  for  the 
purpose  of  more  closely  checking  the  consumption  of  material. 
If  the  material  costs  are  considerably  underestimated,  it  is 
probable  that  leaks  of  considerable  importance  exist  in  the 
methods  of  handling  and  safeguarding  it,  or  wastes  may  be 
occurring  in  the  different  processes  throughout  the  plant. 

In  the  same  way  errors  in  the  estimates  for  labor  may 
disclose  differences  in  the  classifications  of  workers'  time,  and 
it  may  be  discovered  that  labor  which  is  really  direct  has  been 
classified  as  indirect;  or  the  discrepancies  may  disclose  that 
productive  workers  are  not  keeping  up  to  the  time  schedules 
on  which  labor  costs  are  estimated ;  or  that  the  piece  rates  are 
vitiated  by  an  excessive  amount  of  spoiled  or  defective  work. 
Also  differences  invariably  appear  between  the  estimated  and 
actual  overhead  because  in  comparatively  few  cases  are  all  ex- 
pense items  included  in  the  estimated  overhead. 

In  revising  the  estimates  with  the  object  of  making  them 
approximate  as  closely  as  possible  to  the  actual  cost,  no  method 
of  revision  will  give  the  exact  figures.  If,  however,  the  differ- 
ence between  the  book  inventory  and  physical  inventory  as 
regards  any  of  the  elements  be  divided  by  the  number  of  units 
of  product  manufactured  during  the  period,  the  result  will  be 
approximately  the  amount  to  be  added  or  subtracted  from  the 
original  estimated  cost  of  that  element.  This  rule  is  fairly 
accurate  if  the  output  of  the  factory  is  uniform  and  conditions 
as  to  the  material,  labor,  overhead  items,  and  the  production 
in  general  are  fairly  constant.  Any  radical  changes  in  methods 
of  routine  or  manufacture  during  a  period  might  and  prob- 


470  SIMPLIFIED   COST-FINDING   METHODS 

ably  would  cause  wide  discrepancies,  unless  the  estimates  are 
carefully  revised  in  the  light  of  the  changes.  But  if  the  re- 
vision is  methodically  made  at  the  end  of  each  period,  sooner 
or  later  the  estimates  should  approximate  the  true  costs,  the 
accuracy,  of  course,  largely  depending  upon  the  correctness  of 
the  predetermined  figures  as  to  the  cost  of  each  article — as 
established  in  the  schedule  of  estimated  costs  in  the  first  in- 
stance, 

Verification  of  Costs  by  Several  Lots  or 
Groups — Third  Method 

Special  Records  Required 

The  third  development  in  estimated  costs  is  the  division 
of  the  factory  output  into  two  or  more  groups  or  lots  the  costs 
of  which  are  separately  predetermined  and  proved.  For  ob- 
vious reasons  this  development  in  detail  necessitates  the  use 
of  additional  records,  and  thus  the  forms  described  under 
the  preceding  plan  are  supplemented  by  three  more  records — 
five  in  all  being  employed — which  may  be  summarized  as  fol- 
lows: 

1.  Schedules  of  costs,  showing  the  article  costs  in  each 

of  the  groups  or  lots  of  articles  manufactured 
(Form  99,  page  463). 

2.  Records  showing  the  consumption  of  materials  by 

groups  or  lots  (Form  57,  page  267). 

3.  Records  analyzing  the  productive  labor  chargeable 

to  each  group  or  lot  (Form  56,  page  263). 

4.  A  distribution  sheet  showing  the  distribution  of  the 

factory  overhead  over  the  different  lots  manufac- 
tured in  their  proper  proportion  (Form  59,  page 

273)- 

5.  A   cost   of   sales   summary   for  each   lot   of   prod- 

uct on  which  the  estimated  costs  of  each  article 


ESTIMATING   COST   SYSTEMS  471 

sold  within  the  lot  are  summarized    (Form  65, 
page  287). 

While  the  general  use  of  these  records  will  be  understood 
from  the  description  in  preceding  sections  and  chapters,  a  de- 
tailed discussion  of  the  accounts  to  which  the  figures  collected 
on  the  records  are  posted  will  follow  the  discussion  of  the 
treatment  of  the  elements  of  costs  and  the  opening  inventories. 

Raw  Materials  Costs 

As  the  material  used  in  the  manufacture  of  the  various 
lots  of  articles  must  be  separately  recorded,  a  raw  material 
storeroom  may  need  to  be  operated — with  a  stores  ledger  to 
show  receipts  and  withdrawals  and  requisitions  to  show  for 
which  purpose — i.e.,  for  which  lot  of  product — a  particular 
kind  of  material  is  withdrawn  from  stores.  If  each  lot  of  prod- 
uct were  manufactured  from  a  distinct  kind  of  raw  material, 
it  would  be  possible  to  open  a  material  account  with  each  lot 
on  the  purchase  journal  or  voucher  register  and  charge  the 
material  purchases  direct  to  the  account.  Provision  would 
then  have  to  be  made  for  recording  any  transfers  of  material 
charged  to  one  lot  of  product  and  used  on  another.  Usually, 
however  much  the  same  kinds  of  material  would  be  consumed 
in  the  manufacture  of  all  products,  in  which  case  a  complete 
system  of  checking  storeroom  operations  would  then  be  neces- 
sary so  that  the  consumption  of  material  could  be  traced  to 
the  group  of  articles  on  which  applied. 

Labor  Costs 

Productive  labor  costs  are  classified  in  the  same  way  as 
material  costs  so  that  the  proper  charges  can  be  made  to  each 
lot  of  product.  If  certain  employees  work  only  on  the  pro- 
duction of  articles  within  a  group,  it  will  be  unnecessary  to 
report  their  time  daily  as  the  whole  of  it  may  be  charged  to 
the  labor  cost  of  the  group.     But  if  some  employees  divide 


472  SIMPLIFIED    COST-FINDING    METHODS 

their  time  between  groups,  a  simple  system  of  labor  reports 
must  be  introduced  for  the  purpose  of  charging  the  workers' 
time  to  the  groups  on  which  they  are  occupied  in  proportion 
to  the  labor  cost  in  each  case. 

Overhead  Costs 

The  method  of  distributing  the  factory  overhead  over  the 
different  groups  of  articles  may  be  based  on  either  the  produc- 
'  tive  labor  cost  percentage  or  labor  hours  plan,  as  described  in 
Chapter  XL  As  equitable  a  method  as  any  and  the  one  most 
commonly  employed  because  of  its  simplicity  is  to  base  the  dis- 
tribution on  the  percentage  which  labor  cost  bears  to  overhead. 
When  pricing  the  articles  within  a  group  on  the  schedule  of 
estimated  costs  and  the  analysis  of  cost  of  sales,  the  estimated 
overhead  chargeable  to  each  article  would  then  be  based  upon 
a  percentage  of  the  estimated  labor  cost.  Thus,  any  difference 
between  the  detailed  estimated  charges  (for  overhead  on  items 
sold  within  a  group)  and  the  total  actual  charge  (to  each 
group  or  lot)  is  revealed  when  the  book  inventory,  as  will  be 
explained  presently,  is  compared  with  the  actual  inventory. 

Opening  Inventory  Analysis 

The  merchandise  inventory  at  the  beginning  of  the  period 
should  be  analyzed  so  as  to  show : 

1.  The  value  of  the  total  raw  material  in  the  store- 

room. 

2.  The  value  of  the  work  in  process  analyzed  by  groups 

so  that  the  charges  may  be  made  to  the  group 
accounts  kept  with  each  lot  of  product, 

3.  The  value  of  the  finished  stock  analyzed  in  the  same 

way  as  the  work  in  process. 

The  analysis  of  the  inventory  in  the  way  described  fur- 
nishes the  opening  inventory  totals  which  are  the  first  entries 
to  the  ledger  accounts. 


ESTIMATING  COST   SYSTEMS  473 

Operation  of  Ledger  Accounts 

The  accounts  opened  on  the  ledger,  under  this  method, 
for  the  purpose  of  comparing  the  estimated  with  the  actual 
figures  are: 

1.  Raw  Material  account. 

2.  A  department  account  for  each  group  of  products. 

(If  the  factory  output  is  classified  into  twelve 
groups,  twelve  different  department  accounts 
would  be  required. ) 

3.  A  cost  of  sales  account  for  each  group. 

4.  A  sales  account  for  each  group. 

The  total  cost  of  all  raw  material,  as  shown  by  the  mer- 
chandise inventory  at  the  beginning  of  the  period,  is  debited 
to  the  Raw  Material  account ;  and  the  total  cost  of  each  of  the 
various  groups  of  work  in  process  and  finished  stock  items,  as 
classified  on  the  inventory,  is  debited  to  its  department  account. 

If  a  storeroom  is  operated  and  material  is  requisitioned, 
all  purchases  of  material  should  be  charged  to  the  Raw  Ma- 
terial account.  All  expenditures  for  productive  labor  during 
the  period  should  be  charged  to  a  Productive  Labor  account. 
The  expenditures  for  the  different  items  composing  the  fac- 
tory overhead  may  be  charged  to  one  Factory  Overhead 
account,  or  to  each  detailed  expense  account.  If  the  charges 
are  posted  to  detailed  accounts,  provision  must  be  made  for 
accumulating  the  total  and  transferring  it  to  the  Factory  Over- 
head account  at  the  end  of  each  period. 

The  Raw  Material  account  is  credited  with  the  total  ma- 
terial taken  from  stock,  as  shown  on  a  summary  of  material 
requisitions  (Form  57,  page  26y) — the  offsetting  debit  con- 
sisting of  the  charges  posted  to  the  department  accounts  kept 
with  each  group  of  product.  The  Productive  Labor  account 
is  credited  with  the  total  amount  of  productive  labor  applicable 
to  the  different  departments  as  shown  by  the  pay-roll  analysis 


474 


SIMPLIFIED    COST-FINDING    METHODS 


(Form  56,  page  263) — offsetting  debits  being  posted  to  the 
various  department  group  accounts.  Provision  having  been 
made  for  the  distribution,  Factory  Overhead  account  is 
credited  with  the  total  amount  of  overhead — the  offsetting 
debits  being  to  each  of  the  department  accounts. 

Thus  the  department  accounts  kept  with  each  group  of 
products  are  debited  with  the  beginning  inventory  and  the 
current  expenditures.  They  are  credited  with  the  cost  of  all 
sales  of  items  within  the  group — which  credit  entry  is  com- 
piled on  the  summary  of  cost  of  sales  (Form  65,  page  287) 
showing  the  total  cost  of  the  various  sales  in  each  group.  Any 
merchandise  returned  by  customers  should  be  calculated  at  its 
cost  values  and  deducted  from  the  cost  of  sales  totals.  Off- 
setting debit  entries  to  the  department  credit  entries  are  made 
to  separate  cost  of  sales  accounts  for  each  group  of  product 
sold.  Provision  for  crediting  the  sales  of  each  group  to  a 
separate  account  is  made  so  that  the  gross  profit  or  loss  upon 
each  of  the  department  groups  may  be  ascertained  and  a  com- 
prehensive profit  and  loss  statement  thus  prepared. 

Method  of  Verification 

As  under  the  preceding  methods,  the  proving  of  the  re- 
sults in  this  case  also  depends  upon  the  taking  of  a  closing 
physical  inventory  which  must  be  analyzed  and  priced  in  ex- 
actly the  same  way  as  the  beginning  inventory.  A  compari- 
son of  the  book  figures  with  the  amount  shown  by  the  actual 
inventory  furnishes  the  basis  for  judging  whether  or  not  the 
estimated  costs  have  been  accurately  predetermined. 

This  method  of  proving  the  total  cost  of  each  item  within 
separate  groups  may  be  developed  or  extended  to  cover  a 
separate  proof  of  the  elements  of  cost  in  each  case.  To  do 
this  would  entail  the  division  of  each  department  account  into 
a  material,   labor,   and  overhead   account  with  each  group. 


ESTIMATING  COST   SYSTEMS  475 

The  merchandise  inventories  at  the  beginning  and  end  of  the 
period  would  also  have  to  be  analyzed  as  to  the  details  of  the 
material,  labor,  and  overhead  costs  of  each  article  by  groups. 
In  this  way  it  would  be  possible  to  ascertain  not  only  which 
group  of  articles  was  inaccurately  estimated  as  to  total  cost 
but  also  to  which  element  of  cost  the  inaccuracies  were  due. 

Verification  of  Costs  by  Operating  Departments — 
Fourth  Method 

Special  Forms  Required 

The  methods  of  estimating  costs  so  far  described  are 
suited  to  manufacturing  conditions  where  the  operations  or 
processes  of  manufacture  are  comparatively  simple  or  few 
in  number.  When  the  product  undergoes  several  processes 
or  numerous  operations  and  in  consequence  it  is  desirable  to 
control  the  costs  of  different  operating  departments  by  com- 
paring the  estimated  figures  with  the  actual  cost,  the 
estimating  system  may  be  further  developed  by  predetermin- 
ing the  cost  of  each  process  or  each  group  of  operations  and 
controlling  production  by  checking  up  promise  with  perform- 
ance in  any  desired  detail.  To  do  this,  similar  operations  are 
grouped  together  and  productive  departments  or  production 
centers  are  formed  around  which  to  prove  the  items  of  cost. 
The  special  forms  needed  for  compiling  department  cost  are : 

1.  Records  of  the  estimated  costs  analyzed  by  operations 

or  departments.  These  records  give  the  style 
number,  grade,  and  description  of  the  article  and 
provide  money  columns  for  compiling  the  cost  of 
each  department  as  well  as  the  total  cost.  (Form 
99,  page  463.) 

2.  An  analysis  of  the  inventory,  showing  the  value  of 

the  raw  material  stock  and  the  departmental  costs 
of  work  in  process  for  each  department  separately 
and  also  the  value  of  the  finished  stock. 


476  SIMPLIFIED    COST-FINDING    METHODS 

3.  An  analysis  of  purchases  chargeable  to  the  operating 

departments  if  material  purchases  are  not  charge- 
able to  stores.     (Form  50,  page  246.) 

4.  A  summary  of  material  requisitions  supported  by  de- 

tailed material  requisitions,  for  the  purpose  of 
ascertaining  the  total  material  cost  to  be  charged 
to  departments.     (Form  57,  page  267.) 

5.  An  analysis  of  the  pay-roll,  for  the  purpose  of  sum- 

marizing the  productive  and  non-productive  labor 
cost  chargeable  to  each  department.  (This  record 
is  prepared  from  the  detailed  labor  reports  of  em- 
ployees and  proved  with  the  pay-roll  record. 
(Form  56,  page  263.) 

6.  An  overhead  distribution  sheet,  on  which  the  items 

of  factory  overhead  are  compiled  and  distributed 
so  that  the  totals  chargeable  to  operating  depart- 
ments may  be  obtained.     (Form  59,  page  273.) 

7.  A  production  summary,  for  the  purpose  of  ascertain- 

ing the  credits  for  finished  goods  to  be  posted  to 
the  operating  departments.  (This  summary  is 
prepared  from  the  detailed  production  reports  of 
factory  employees.     (Form  60,  page  274.) 

8.  A  cost  of  sales  summary,  showing  the  total  cost  of 

the  articles  sold  and  shipped  and  the  cost  of  any 
merchandise  returned  by  customers.  (Form  65, 
page  287.) 

Ledger  Accounts  Opened 

The  accounts  opened  for  the  purpose  of  proving  the  esti- 
mated department  costs  are : 

1.  One  Raw  Material  account 

2.  Separate  Work  in  Process  accounts 

3.  One  Finished  Stock  account 

4.  One  Cost  of  Sales  account 


ESTIMATING  COST   SYSTEMS  477 

Charges  for  Expenditures 

The  Raw  Material,  Work  in  Process,  and  Finished  Stock 
accounts  are  charged  with  the  total  value  of  the  inventory 
items  to  which  each  relates,  as  shown  by  the  beginning  inven- 
tory. The  merchandise  purchases  may  be  charged  to  Raw 
Material  account  if  taken  into  the  storeroom,  but  if  some  ma- 
terial goes  direct  to  an  operating  department,  provision  may  be 
made  on  the  purchase  journal  or  voucher  record  for  charging 
the  merchandise  to  the  department  which  receives  it. 

The  department  work  in  process  accounts  are  charged 
with: 

1.  The  material  used  in  each  operating  department  as 
shown  on  either  the  purchase  record  when  charged  direct,  or 
the  summary  of  material  requisitions  (Form  57,  page  267), 
prepared  from  the  detailed  material  requisitions.  The  total  of 
these  charges  is  posted  to  the  credit  of  the  Raw  Material 
account  directly  from  the  summary.  Any  transfers  of  mate- 
rial from  one  department  to  another  should  be  recorded  on  a 
separate  summary  so  that  postings  may  be  made  to  the  debit 
or  credit  of  the  department  accounts  affected. 

2.  The  productive  labor  cost  applicable  to  each  operating 
department  at  the  time  the  wages  are  paid;  or  provision  may 
be  made  for  summarizing  wages  in  a  Productive  Labor  ac- 
count, which  is  credited  with  the  detailed  charges  debited  to 
departmental  work  in  process  accounts.  The  analysis  of  the 
productive  labor  charges  is  made  upon  the  pay-roll  analysis 
(Form  56,  page  263)  which,  as  already  stated,  should  agree 
with  the  pay-roll  record. 

3.  The  factory  overhead,  the  charge  in  each  case  being 
derived  from  the  expense  analysis  sheet  (Form  59)  referred 
to,  on  which  the  various  items  of  factory  expense  are  distrib- 
uted. Any  of  the  methods  of  expense  distribution  outlined  in 
Chapter  XI  may  be  employed  for  the  purpose  of  allocating  the 
different  items  to  departments. 


478  SIMPLIFIED    COST-FINDING    METHODS 

Thus,  the  operating  department  accounts  which,  as  ex- 
plained later,  are  used  as  a  basis  for  establishing  the  proof 
according  to  this  plan  are  charged  with : 

1.  The  cost  of  the  items  in  process  at  the  date  of  the 

beginning  inventory. 

2.  The  charges  of  material,  labor,  and  overhead  affect- 

ing each  operating  department. 

Crediting  Production 

As  the  manufacture  of  the  product  is  completed,  detailed 
reports  are  received  by  the  office  from  the  factory  showing  the 
disposition  of  the  finished  goods  and,  from  this  information,  a 
production  summary  (Form  60,  page  274)  is  prepared  to 
ascertain  the  cost  to  be  credited  to  the  department  accounts. 
The  different  kinds  and  quantities  of  articles  produced  are 
priced  at  their  estimated  cost  as  shown  on  the  schedule  of  esti- 
mated costs.  The  totals  to  be  credited  to  the  department  work- 
in-process  accounts  represent  the  estimated  cost  of  each  depart- 
ment's operations  upon  its  actual  production.  After  the  credit 
entries  are  made,  the  balance  of  the  accounts  should  represent 
the  cost  of  any  work  in  process  at  the  end  of  the  period.  The 
total  amount  of  the  department  credits  is  debited  to  the  Fin- 
ished Stock  account  if  all  items  are  stored  as  finished  stock. 

Recording  Cost  of  Sales 

The  Finished  Stock  account,  as  already  stated,  is  charged 
with  the  cost  of  any  finished  stock  on  hand  at  the  beginning  of 
the  period  and  with  the  cost  of  the  articles  produced  during 
the  period  as  shown  by  the  summary  (Form  60).  As  invoices 
are  made  out,  provision  must  be  made  for  recording  the  cost 
of  the  shipments  (at  their  estimated  price,  be  it  noted)  and  to 
this  end  the  estimated  or  predetermined  costs  may  be  entered 
upon  either  a  copy  of  the  invoice  or  the  sales  record  (Form 
62).     The  quantities  of  the  different  articles  shipped  may  be 


ESTIMATING   COST    SYSTEMS 


479 


summarized  at  the  end  of  the  period  to  obtain  the  total  cost  of 
sales,  from  which  should  be  deducted  the  cost  of  any  returns  be- 
fore the  postings  are  made  to  the  ledger  accounts.  The  total 
cost  of  the  net  sales  (sales,  less  returns)  is  posted  to  the  credit 
of  the  Finished  Stock  account  if  all  the  merchandise  shipped  is 
finished  stock,  the  offsetting  debit  being  to  the  Cost  of  Sales 
account.  The  balance  of  the  Finished  Stock  account  repre- 
sents the  value  of  the  book  inventory  of  finished  stock  on  hand. 

Method  of  Verification 

The  predetermined  costs  are  verified  with  the  actual  pro- 
duction figures  by  taking  a  physical  inventory  of  the  items  of 
raw  material,  work  in  process,  and  finished  goods,  pricing 
them  at  the  same  values  as  in  the  opening  inventory  and  com- 
paring the  results  with  the  book  inventories.  The  advantage  of 
this  plan  is  not  only  that  a  test  may  be  made  of  each  of  the 
classifications  of  the  inventory  separately,  but  that  the  cost  of 
production  may  also  be  analyzed  in  any  desired  detail  in  the 
first  instance  and  the  results  or  actual  figures  compared  with 
those  first  estimated  and  with  the  figures  of  previous  periods. 
Discrepancies  in  the  estimated  cost  will  as  a  rule  be  discovered 
as  the  balances  of  the  work  in  process  accounts  are  com- 
pared with  the  actual  quantity  of  the  work  in  process  on  hand 
inventoried  at  its  estimated  cost. 

The  control  of  costs  by  means  of  estimates  of  the  depart- 
mental cost  of  the  product,  as  here  outlined,  is  particularly 
applicable  to  the  manufacture  of  a  complicated  article  in  large 
quantity.  While  the  system  may  be  expanded  to  cover  the 
manufacture  of  several  kinds  of  product,  it  will  be  readily  un- 
derstood that  such  a  development  would  necessitate  a  corre- 
sponding increase  in  the  number  of  accounts  and  records — so 
much  so  that  the  amount  of  detail  would  be  almost  as  much  as 
that  involved  in  the  operation  of  a  job  order  system. 

It  should  be  noted  that  the  system  may  also  be  developed 


48o  SIMPLIFIED    COST-FINDING    METHODS 

and  its  accuracy  increased  by  the  use  of  controlling  accounts 
for  different  kinds  of  raw  material  and  (if  a  variety  of  prod- 
ucts is  manufactured)  for  different  kinds  of  finished  stock. 

Adjusting  Differences  in  Inventory 

In  the  operation  of  every  estimating  cost  system  the  most 
careful  attention  should  be  given  to  the  make-up  of  the  esti- 
mates in  the  first  instance.  The  figures  which  appear  on  the 
schedule  of  estimated  costs  are  those  on  which  the  pricing  of 
the  inventories  is  based.  They  constitute  the  cost  sheets  of  the 
articles  priced  thereon,  in  that  they  state  the  article  cost  which 
is  used  for  making  the  selling  prices.  Any  errors  in  the  esti- 
mated figures  necessarily  affect  the  inventory  valuations  and 
throw  the  whole  system  of  proof  out  of  gear.  When  discrep- 
ancies appear  between  the  values  of  the  book  and  the  physical 
inventories,  it  is  important  to  adjust  the  estimated  costs  and 
revalue  the  inventories  at  the  close  of  the  period.  As  regards 
the  discrepancies  in  the  accounts  of  the  current  period,  if 
the  value  of  the  physical  inventory  is  found  to  be  less 
than  that  of  the  book  inventory,  the  costs  have  been 
understated  and  the  difference  constitutes  a  loss;  as  such  it  is 
transferred  to  profit  and  loss.  If  the  physical  inventory  proves 
to  be  greater  than  the  book  inventory,  the  costs  have  been  over- 
estimated and  the  difference  constitutes  a  profit  which  may 
be  credited  to  either  profit  and  loss  or  cost  of  sales.  How- 
ever, it  should  be  clearly  understood  that  when  discrepancies 
show  that  the  estimated  costs  have  been  incorrectly  figured, 
the  differences  should  not  be  charged  to  Profit  and  Loss  ac- 
count before  considering  the  effect  on  the  closing  inventories. 
If  the  estimated  costs  are  incorrect,  the  inventory  values  based 
on  them  must  also  be  incorrect.  Therefore,  any  adjustments 
also  affect  the  closing  inventories,  the  value  of  which  should 
be  revised. 


CHAPTER  XXIX 

UNIFORM  COST  METHODS 

The  Advantages  of  Standard  Methods 

The  advantages  of  standardization  when  applied  to  ma- 
chinery and  manufacturing  operations  as  a  means  of  promot- 
ing efficiency  of  production  are,  today,  well  recognized.  The 
same  principle  can  with  equal  advantage  be  applied  to  cost 
methods.  The  establishment  of  uniform  cost  methods  has 
been  advocated,  through  manufacturing  conventions,  for  the 
last  fifteen  years  and  in  some  trades  uniform  methods  have 
been  widely  adopted. 

It  would  be  well  to  correct  at  the  outset  a  misunderstand- 
ing of  the  term  "uniform  cost  systems."  Such  a  definition 
implies  in  the  minds  of  many  that  the  system  adopted  by 
a  particular  trade  or  industry  is  uniform  in  all  its  details 
and  ramifications.  Such  uniformity  would  be  wholly  im- 
practicable. A  more  exact  term  to  use  would  be  "uniform 
methods  of  cost-finding,"  the  definition  here  implying  that, 
while  the  methods  are  uniform,  the  records,  forms,  etc.,  neces- 
sarily vary  to  suit  the  needs  of  the  individual  case. 

There  are  many  pertinent  reasons  for  the  adoption  of 
uniform  cost-finding  methods,  especially  in  trades  where  com- 
petition is  keenly  felt.  While  it  is  not  possible  under  existing 
laws  to  establish  uniform  selling  prices,  there  is  no  law  to  pre- 
vent uniform  cost  methods.  The  advantage  of  basing  sell- 
ing prices  on  such  uniform  methods  is  that  each  manufac- 
turer in  the  same  industry  then  knows  that  the  price  he 
asks  for  his  product  is  a  fair  selling  price.  If  he  can- 
not compete  with  other  concerns  which-  figure  costs  and  sell- 
ing prices  in  the  same  way,  he  is  forced  to  conclude  that  his 

481 


482  SIMPLIFIED    COST-FINDING    METHODS 

costs  are  too  high.  In  that  case  it  is  up  to  him  to  analyze 
closely  his  methods  of  manufacturing — whether  or  not  he  is 
buying  his  materials  at  the  right  prices  or  using  the  most  up- 
to-date  machinery  and  methods;  whether  his  operating  de- 
partments are  properly  balanced  and  his  production  is  com- 
mensurate with  his  expenditures  for  labor  and  overhead ;  and 
so  on. 

Many  manufacturers  are  unable  to  figure  how  competing 
concerns  can  sell  products  similar  to  their  own  at  a  much 
lower  price.  There  are,  of  course,  certain  articles  called  "lead- 
ers," which  are  sold  at  cost  or  less  than  cost  for  the  purpose 
of  influencing  trade.  Ignoring  these  articles,  the  only  ex- 
planation of  the  fact  that  like  articles  are  frequently  sold  at 
different  prices  by  competing  manufacturers  is  either  that  their 
methods  of  figuring  costs  or  profits  differ,  or  that  the  actual 
costs  are  much  higher  in  one  case  than  in  another. 

Examples  of  Haphazard  Methods 

Some  years  ago  the  secretary  of  a  certain  trade  asso- 
ciation sent  out  a  Hst  of  unclassified  overhead  items  to  mem- 
bers of  the  trade,  with  a  request  to  classify  them  under  the 
heads  of  factory  overhead,  selling,  and  administrative  ex- 
penses. The  replies  were  to  be  designated  by  numbers  and 
presented  at  a  forthcoming  convention,  without  divulging  the 
names  of  the  concerns  furnishing  the  information. 

Out  of  fifty  replies  received  no  two  classifications  of  the 
various  items  of  expense  were  in  agreement.  Furthermore, 
some  omitted  administrative  expenses  altogether  from  the 
cost,  some  added  interest  on  investments,  others  did  not,  and 
several  failed  to  include  the  salaries  of  the  executives  as  part 
of  the  administrative  expenses.  This  test  clearly  showed  the 
need  of  uniformity  in  methods  of  cost-finding.  Toward  this 
goal  much  progress  has  been  made  in  recent  years — as  is 
proved  by  the  gradual  abandonment  of  the  old-style  method  of 


UNIFORM   COST  METHODS  483 

cost  figuring  of  twenty  years  ago.    This  last  method  is  illus- 
trated by  the  following  experience. 

About  twenty  years  ago  a  New  York  capitalist  was  anx- 
ious to  find  out  how  costs  were  figured  in  a  New  England 
factory.  The  general  manager  of  the  concern,  when  requested 
to  explain  his  method,  exhibited  the  following  schedule : 

Style,  100 

Material  Cost   $2.00  per  dozen 

Labor  Cost 3.00    "        " 

Total   $5.00    " 

Add  .50% 2.50    " 

Selling  Price  $7.50    " 

When  asked,  "Where  are  your  overhead,  selling  ex- 
penses, and  profits?"  the  reply  was,  "It  is  all  included  in  the 
50%";  and  in  reply  to  the  further  question,  "How  much  of 
that  $2.50  is  overhead,  how  much  selling  expense,  and  how 
much  profit?"  the  answer  was,  "I  never  figured  that  out.  I 
only  know  that,  by  selling  the  article  at  $7.50  a  dozen,  I 
reaHze  a  profit." 

Though  no  modem  manufacturer  works  today  in  such 
darkness,  it  is  a  common  practice  to  estimate  material,  labor, 
and  overhead  costs  and  add  an  arbitrary  percentage  for  selling 
and  administrative  expenses  and  profit.  A  selling  price  is 
thus  determined  with  no  knowledge  of  how  near  any  of  these 
estimates  ^re  to  the  actual  facts, 

Method  of  Standardizing  Costs 

Every  manufacturer  should  use  his  influence  to  bring 
about  the  adoption  of  uniform  methods  in  his  own  trade. 
Such  methods  should  be  based  on  the  fundamental  principles 
of  cost  accounting,  and  should  show  the  correct  distribution 
of  the  elements  of  cost.  Standardization  is  applicable  to  all 
systems  alike — estimated,  order,  or  process  costs. 


484  SIMPLIFIED   COST-FINDING    METHODS 

In  the  standardization  of  methods  the  first  steps  are 
to  estabHsh  a  uniform  classification  of  the  products  of  the 
trade  and,  so  far  as  is  practicable,  a  uniform  classification 
of  the  operating  departments.  Different  operating  conditions 
may  sometimes  interfere  with  uniformity  as  between  produc- 
tive and  non-productive  departments. 

Attention  should  next  be  directed  to  the  classification  of 
the  direct  material  and  direct  labor  items.  Opinions  some- 
times differ  in  the  same  trade  as  to  which  of  the  various  classes 
of  raw  material  are  to  be  treated  as  part  of  the  prime  cost 
and  which  as  an  expense.  Under  some  conditions,  some  ma- 
terial items  may  have  to  be  handled  as  an  indirect  charge  for 
the  reason  that  it  may  be  impracticable  to  treat  them  in  any 
other  way. 

The  standardization  of  the  productive  labor  costs  should 
cover  all  processes  and  operations.  Investigation  may  show 
that  certain  kinds  of  work  are  treated  as  productive  labor  cost 
in  one  plant,  whereas  in  another  the  same  costs  are  applied  to 
the  product  in  an  indirect  manner. 

The  treatment  of  the  factory  overhead,  selling  expenses, 
and  administrative  expenses  necessarily  varies  in  different 
factories  in  the  same  line  of  business.  The  size  of  the  or- 
ganization, location  of  the  plant,  method  of  marking  the  mer- 
chandise, method  of  obtaining  material,  the  labor  situation, 
and  many  other  factors  may  lead  to  marked  difference  in  the 
way  overhead  is  handled.  However,  if  this  element  of  cost 
is  to  be  as  uniform  as  possible  throughout  the  trade,  the  items 
composing  it  should  be  classified,  where  practicable,  in  the 
same  way. 

The  methods  of  distributing  overhead  to  the  vario-i?  de- 
partments of  the  plant,  and  finally  to  the  product,  oftentimes 
differ  gjeatly  as  between  manufacturers  in  the  same  line  of 
business.  As  the  methods  of  distribution  are  in  all  cases  ar- 
bitrary and  some  of  the  figures  are  estimated,  uniform  methods 


UNIFORM   COST  METHODS  485 

of  treating  overhead  are  difficult  to  adopt  throughout  a  par- 
ticular trade.  Nevertheless,  the  nearer  a  standard  ideal  is  ap- 
proached, the  fewer  will  be  the  variations  in  costs. 

Details  to  be  Considered 

After  the  elements  of  cost  have  been  broadly  considered 
and  disposed  of,  further  details  in  connection  with  each  should 
be  taken  up.  One  thing  which  often  varies  in  different  plants 
in  the  same  industry  is  the  method  of  handling  the  raw  ma- 
terial— putting  it  into  operation  and  accounting  for  it  while 
in  process.  These  are  details  which  can  usually  be  standardized 
without  much  difficulty.  The  items  of  scrap,  waste,  and 
spoiled  material  should  also  receive  consideration. 

The  standardization  of  the  productive  labor  cost  is  some- 
times complicated  by  the  use  of  automatic  machinery.  Where 
this  kind  of  equipment  is  employed,  large  differences  in  cost 
calculations  as  between  plants  in  the  same  industry  are  often 
revealed.  Where  specialized  machinery  has  been  devised 
within  a  plant  for  its  particular  requirements,  information  as 
to  the  cost  of  operating  such  machinery  is  usually  extremely 
confidential  in  character.  Therefore,  under  these  circum- 
stances it  is  often  impracticable  to  compare  the  labor  costs  of 
different  plants  with  a  view  to  the  adoption  of  uniform  meth- 
ods of  calculation.  The  study  of  the  productive  labor  items 
should  include  the  method  of  paying  wages  and  accommoda- 
tions afforded  the  various  factory  employees. 

Where  the  manufactured  articles  undergo  different  proc- 
esses, it  is  impossible  to  compare  the  costs  unless  they  are 
analyzed  departmentally.  In  making  the  analysis,  all  the  items 
of  overhead  which  apply  directly  to  departments  should  be  so 
charged,  leaving  only  a  residue  of  general  operating  expenses 
to  be  prorated  equitably  over  all  departments. 

It  should  be  borne  in  mind  that  it  is  not  essential  for 
the  uniform  cost  methods  adopted  by  a  given  trade  to  be 


486  SIMPLIFIED   COST-FINDING   METHODS 

Strictly  scientific  and  accurate.  Their  main  object  and  the  chief 
advantage  of  their  use  is  that  all  costs  may  be  figured  in 
precisely  the  same  way.  Any  mistakes  made  in  determining 
the  selling  price  would  then  be  the  same  throughout  that  par- 
ticular trade,  in  which  event  unfair  and  ignorant  competition 
would  cease  despite  the  faults  or  deficiencies  in  the  methods  of 
cost-finding  adopted. 

While  the  value  of  applying  uniform  cost  accounting 
methods  to  every  trade  cannot  be  questioned,  it  must  be  ac- 
knowledged that  it  is  always  a  difficult  matter  to  bring  the 
manufacturers  of  a  particular  line  together  and  induce  them  to 
adopt  uniform  methods  as  a  body.  If,  however,  such  methods 
should  be  contemplated  by  any  body  of  manufacturers,  the  cost 
of  studying  conditions  and  devising  an  appropriate  system 
should  be  undertaken  and  carried  out  by  a  committee  appointed 
by  the  association,  with  full  power  to  act.  If  this  matter  is  left 
with  the  members  of  the  trade  individually,  little  progress  will 
be  made,  for  the  reason  that  most  manufacturers  believe  that 
it  is  the  "other  fellow"  who  is  not  correctly  figuring  his  costs. 


Part  VII— Cost-Plus  Contracts 


CHAPTER  XXX 

RECOMMENDATIONS  OF  INTERDEPARTMENTAL 
COST    CONFERENCE 

Work  of  Conference 

During  the  summer  of  191 7  an  Interdepartmental  Con- 
ference on  Uniform  Contracts  and  Cost  Accounting  Definitions 
was  organized  at  Washington  to  consider  and  make  recom- 
mendations concerning  the  matters  named  in  its  title.  The 
conference,  which  consisted  of  delegates  from  the  Departments 
of  War,  Navy,  Commerce,  the  Federal  Trade  Commission,  and 
the  Council  of  National  Defense,  published  a  pamphlet  under 
date  of  July  31,  191 7,  making  certain  recommendations  in 
connection  with  contracts  and  costs.  The  author,  who  at  that 
time  was  chief  of  the  Division  of  Cost  Accounting  of  the 
Department  of  Commerce,  had  the  honor  of  being  chairman  of 
the  conference  from  the  time  of  its  inception  until  the  report 
was  made. 

It  is  not  the  author's  intention  to  present  any  arguments 
for  or  against  the  usual  terms  of  government  contracts.  The 
purpose  of  this  chapter  is  to  deal  particularly  with  cost  items 
as  applied  to  cost-plus  contracts.  To  understand  their  appli- 
cation, however,  it  is  advisable  for  the  reader  to  be  familiar 
with  the  report  of  the  Interdepartmental  Cost  Conference  on 
Contracts,  and  therefore  the  recommendations  issued  by  its 
delegates  are  herewith  reproduced. 

487 


488  COST-PLUS   CONTRACTS 

Recommendations — Their  Object 

"These  recommendations  are  intended  to  suggest  to  con- 
tracting officers  some  of  the  broad  legal  and  equitable  points 
involved  in  war  contracts,  and  to  express  the  preference  of 
the  conference  for  a  straight  purchase-and-sale  contract  at 
a  fixed  price,  since  it  is  simpler  in  terms,  easier  to  work  under, 
and  generally  speaking,  productive  of  better  and  quicker  re- 
sults. The  British  Government,  after  several  years'  expe- 
rience, has  discarded  the  cost-plus  contract  plan  and  adopted 
the  straight  purchase-and-sale  contract  in  every  instance  pos- 
sible. It  is  not  proposed  to  go  into  the  large  question  of  policy 
involved  in  attempting  to  prevent  demoralization  of  markets 
by  excessive  competition.  Suffice  to  say,  that  the  Govern- 
ment can  furnish  material  and  component  parts  under  either 
a  fixed-price  or  a  cost-plus  contract,  and  thus  protect  conditions 
by  purchases  in  bulk.  Recommendations  and  brief  discus- 
sion follow. 

Fair  Terms  and  Fixed  Prices 

*Tt  is  recommended  that,  in  every  instance  where  fair 
terms  can  be  obtained,  contracts  should  be  in  the  form  of 
straight  purchase-and-sale  contracts  at  fixed  prices. 

*Tn  the  determination  of  'fair  terms'  for  fixed  price  con- 
tracts, the  contractor,  in  so  far  as  possible,  should  be  required 
to  state  the  cost  and  other  factors  upon  which  his  price  is 
based;  such  representations  to  be  the  subject  of  investigation 
by  the  contracting  officer  prior  to  the  final  execution  of  the 
contract,  and  if  found  to  be  incorrect,  the  price  to  be  adjusted 
accordingly. 

"What  constitutes  'fair  terms'  can  be  arrived  at  only  by 
consideration  of  many  factors,  such  as: 

1.  The  quality  and  quantity  of  the  articles  purchased. 

2.  Whether  or  not  the  plant  is  adaptable  to  business 

other  than  war  business. 


INTERDEPARTMENTAL   COST   CONFERENCE  489 

3.  The  duration  of  the  job  and  the  length  of  time  the 

contractor's  plant  and  capital  will  be  tied  up.  Also 
the  amount  of  capital  tied  up  in  comparison  with 
the  particular  output  contracted  for. 

4.  The  possibility  of  fluctuations  in  material  and  labor 

costs  with  attendant  risk  to  the  contractor. 

5.  Loss  in  commercial  business  by  taking  Government 

work,  which  must  be  given  precedence ;  disarrange- 
ment in  plant  organization  and  labor  conditions. 

6.  Comparison  with  prices  of  other  manufacturers,  com- 

petitive bidding,  etc. 

7.  The  prosperity  of  the  trade  and  of  the  particular  con- 

tractor. 

"In  certain  instances  where  the  article  is  standard,  or- 
dered in  bulk,  deliverable  promptly,  a  profit  amounting  to  10% 
of  costs  is  unreasonably  high.  In  other  instances  where  the 
quality  of  the  job  is  high,  the  quantity  small,  or  where  the  job 
ties  up  the  contractor's  plant  and  capital  for  a  long  period  of 
time,  or  where  the  material  and  labor  risk  is  considerable,  or 
for  other  similar  reasons,  such  10%  profit  may  well  be  un- 
reasonably low. 

"Again,  in  agreeing  upon  'fair  terms'  the  following  fac- 
tors should  be  considered,  any  or  all  of  which  greatly  aid  the 
contractor  and  should  tend  to  lower  the  price. 

1.  United  States  to  supply  material  or  component  parts. 

2.  United  States  to  readjust  price  in  the  event  of  fluc- 

tuations in  price  of  material  or  component  parts 
resulting  in  increased  costs. 

3.  United  States  to  readjust  price  in  the  event  of  labor 

disputes  resulting  in  increased  labor  costs. 

4.  United  States  to  make  frequent  payments  to  reim- 

burse the  contractor  for  expenditures  for  material, 
component  parts,  or  the  like. 


490  COST-PLUS   CONTRACTS 

"To  skimp  fair  terms  will  inevitably  tend  to  cause  con- 
tractors to  lose  interest  in  production  and  disturb  general 
business  conditions.  Fair  terms  can  only  be  determined  by 
consideration  of  these  general  principles  as  well  as  the  special 
factors  indicated  above  that  may  apply  to  the  particular  pro- 
duction contracted  for. 

Form  of  Purchase-and-Sale  Contract 

"It  is  recommended  that  a  standard  form  of  straight  pur- 
chase-and-sale  contract  at  a  fixed  price  be  adopted  for  use 
wherever  practicable.  It  should  contain  clauses  which  will 
deal  with  the  following  subjects: 

1.  Method  of  delivery;  storage  of  production;  shipment 

to  point  designated. 

2.  United  States  to  pay  for  raw  material  when  delivered 

to  contractor. 
,  3.  United  States  to  have  the  right  itself  to  supply  ma- 
terial and  component  parts. 

4.  United  States  to  adjust  price  on  increased  material 

costs  above  estimated  costs. 

5.  United  States  to  adjust  price  on  increase  in  labor 

costs. 

6.  Liquidated  damages. 

7.  War  clause  termination. 

"Although  a  straight  purchase-and-sale  contract  for  a 
fixed  price  adjusted  as  indicated  is  greatly  to  be  preferred, 
nevertheless  in  numerous  instances  the  United  States  will  be 
obliged  to  obtain  production  by  paying  for  the  entire  cost  of 
the  same  and  in  addition  a  fair  profit  to  the  contractor. 
Such  cost-plus  contracts  may  be  necessary  under  the  following 
conditions : 

I.  Where  the  production  is  novel  and  the  contractor  has 
had  no  past  experience  upon  which  to  base  a  price ; 


INTERDEPARTMENTAL  COST  CONFERENCE 


491 


for  example,  steel  helmets,  large  caliber  guns  and 
shells  for  same,  aeroplane  motors,  and  the  like. 

2.  Where  the  production  involves  difficult  and  compli- 

cated manufacturing  effort  subject  to  changing 
plans  and  specifications,  or  wide  fluctuations  in 
material  costs;  for  example,  steel  and  wooden 
ships,  aeroplanes,  optical  glass-work,  and  the  like. 

3.  Where  the  contractor,  though  deserving  of  confidence, 

lacks  sufficient  working  capital  and  plant  equip- 
ment to  carry  through  the  job. 

4.  Engineering  or  building  jobs  for  which  the  cost-plus 

contract  has  for  many  years  been  standard, 

Relations  Established  by  Contract 

"It  must  be  borne  in  mind  that  a  cost-plus  contract  estab- 
lishes a  relation  of  trust  between  the  United  States  and  the 
contractor,  in  which  the  contractor  is  legally  responsible  at 
all  times  to  work  in  the  interest  of  the  United  States  and  re- 
ceive no  profit  beyond  that  definitely  specified  in  his  contract. 
For  all  excessive  costs,  hidden  profits  in  the  form  of  depre- 
ciation, overhead,  discounts,  and  the  like,  the  United  States 
may  refuse  to  pay,  or,  if  the  contractor  has  thereby  profited, 
may  sue  and  recover.  Practically,  however,  the  interests  of 
the  United  States  and  the  contractor  are  inevitably  opposed 
if  the  profit  is  based  upon  a  percentage  of  cost.  The  tempta- 
tion is  great  to  the  contractor  to  inflate  his  own  costs,  as  well 
as  the  costs  of  subcontractors,  and  the  task  of  the  United  States 
is  difficult  and  burdensome  in  checking  and  determining  proper 
costs. 

Fixed  Profit  Plan 

"It  is  recommended  that  In  cost-plus  contracts  a  fixed 
profit  of  a  definite  sum  of  money  per  article  be  agreed  upon 
instead  of  a  percentage  of  cost. 


492  COST-PLUS   CONTRACTS 

"Such  fixed  profit  can  be  arrived  at  by  taking  a  percent- 
age, say  10%,  of  the  estimated  cost  of  each  article  or  the  entire 
job.  In  instances  where  estimates  of  cost  are  impracticable, 
it  becomes  of  paramount  importance  to  choose  a  contractor 
in  whose  integrity  the  United  States  may  have  the  fullest  con- 
fidence. Where  a  fairly  close  estimate  can  be  made  of  the  cost 
of  the  article  or  job,  upon  the  completion  of  the  contract  the 
actual  cost  can  be  checked  against  the  agreed  estimate  and  the 
contractor  permitted  to  share  in  the  saving,  or  be  charged  with 
part  of  the  excess  of  cost,  depending  upon  the  outcome.  Such 
an  arrangement  stimulates  the  contractor  to  save  costs  and 
time,  because  the  two  go  together.  This  cost-plus  adjustable 
fixed-profit  contract  unquestionably  affords  the  Government 
the  greatest  protection  in  cost-plus  contracts.  Great  care 
should  be  used  in  fixing  the  estimated  price,  which,  if  too  high, 
may  result  in  giving  the  contractor  a  profit  entirely  unde- 
served. 

Adjustment  of  Fixed  Profit 

"It  is  recommended  that  in  cost-plus  contracts  the  fixed 
profit  agreed  on  be  subject  to  adjustment,  so  that  the  contrac- 
tor may  share  in  the  saving  of,  or  be  charged  with  part  of  the 
excess  of,  actual  cost  over  estimated  cost.  In  some  instances 
the  contractor  may  agree  to  pay  for  all  excess  over  a  certain 
named  figure  of  cost,  and  the  advantage  to  the  United  States 
in  such  an  arrangement  is  too  obvious  for  comment. 

"In  the  determination  of  costs,  direct  labor  and  direct 
material  are  easily  ascertainable;  it  is  the  indirect  charges  to 
the  job,  overhead,  and  depreciation,  that  present  difficulties. 
To  contract  to  pay  a  proper  charge  for  overhead  and  deprecia- 
tion leaves  the  door  wide  open  for  endless  discussion,  and  it  is 
suggested  that  wherever  possible  the  amount  of  these  items 
be  tentatively  fixed  in  advance,  based  on  definite  representa- 
tions of  the  contractor  as  to  the  amount  of  fixed  capital  assets 


INTERDEPARTMENTAL   COST    CONFERENCE  493 

to  be  depreciated  and  the  estimated  overhead.  Such  amounts 
should  always  be  subject  to  revision  in  case  such  representa- 
tions prove  to  be  incorrect.  This  puts  it  up  to  the  contractor 
to  make  an  honest  representation  and  provides  ample  opportu- 
nity to  check  the  same. 

Standardized  Forms  and  Methods 

"It  is  of  the  utmost  importance  that  standardized  forms 
of  contract  as  well  as  standardized  methods  of  determining 
costs  be  applied  to  this  class  of  contracts.  Such  standardiza- 
tion will  produce  clarity  in  the  relation  between  the  contractor 
and  the  United  States  and  will  fix  precedents  of  construction 
for  certain  clauses  and  terms.  Standardization  will  also  af- 
ford great  protection  to  the  United  States,  not  alone  presently 
in  determining  points  of  difference  but  also  in  Court  of  Claims 
suits  that  may  arise.  It  is  recommended  that  a  standard  form 
of  cost-plus  contract  be  adopted  for  use  wherever  practicable. 
As  conditions  necessitate  changes,  the  form  of  such  standard 
contract  can  be  changed  to  suit. 

Summary  of  Recommendations 

"i.  It  is  recommended  that  in  every  instance  where  fair 
terms  can  be  obtained,  contracts  should  be  in  the  form  of 
straight  purchase-and-sale  contracts  at  fixed  prices. 

"2,  It  is  recornmended  that  a  standard  form  of  straight 
purchase-and-sale  contract  at  a  fixed  price  be  adopted  for  use 
wherever  practicable  containing  special  war  clauses. 

"3.  It  is  recommended  that  in  cost-plus  contracts  a  fixed 
profit  of  a  definite  sum  of  money  per  article  be  agreed  upon 
instead  of  a  percentage  of  cost. 

"4.  It  is  recommended  that  in  cost-plus  contracts  the  fixed 
profit  agreed  on  be  subject  to  adjustments,  so  that  the  con- 
tractors may  share  in  the  saving  of,  or  be  charged  with  part 
of  the  excess  of,  actual  cost  over  estimated  cost. 


494  COST-PLUS  CONTRACTS 

"5.  It  is  recommended  that  a  standard  form  of  cost-plus 
contract  be  adopted  for  use  wherever  practicable." 

Normal  Costs  versus  Total  Costs 

As  the  term  "normal  costs"  is  used  in  many  government 
contracts,  the  attention  of  the  reader  is  particularly  called  to 
the  definition  of  its  meaning  as  frequently  employed  in  the 
following  pages. 

Normal  costs  are  based  on  an  estimated  cost  per  unit. 
Sometimes  material  is  used  as  the  basic  figure  and  some  con- 
tracts provide  that  the  normal  cost  may  either  be  reduced  or 
raised  by  any  change  in  the  price  of  material.  The  intention 
of  this  proviso  is  that  the  contractor  shall  suffer  neither  loss 
nor  gain  by  changes  in  the  market  price  of  material.  Many 
contracts  allow  10%  on  cost  with  the  proviso  that  if  upon  the 
completion  of  the  job  the  cost  per  unit  exceeds  the  estimated 
normal  cost,  20%  of  the  amount  of  such  excess  cost  shall  be 
deducted  from  the  amount  of  profit;  on  the  other  hand,  if  the 
cost  falls  below  the  estimated  normal  cost,  the  contractor  shall 
be  entitled  to  receive,  in  addition  to  the  regular  10%,  20% 
upon  the  amount  of  the  difference  between  such  normal  cost 
and  the  actual  cost  of  the  delivered  units.  In  addition  to  this 
explanation,  a  contract  usually  outlines  the  elements  that  are 
to  enter  into  the  normal  cost. 

In  contracts  based  on  normal  cost  a  clear  distinction 
should  be  drawn  between  normal  and  total  costs.  While  the 
normal  costs  would  contain  all  the  usual  elements  of  manu- 
facturing cost,  the  total  costs  would  include  not  only  the 
normal  but  any  special  charges  such  as  those  incurred  by  the 
purchase  of  special  facilities  required  for  the  manufacture  of 
a  particular  product  or  incurred  in  connection  with  experiments 
and  preliminary  expenses.  This  matter  has  an  important  bear- 
ing on  the  cost  of  any  product  when  a  change  is  made  from 
a  cost-plus  to  a  fixed-price  basis.    While  the  normal  costs  may 


INTERDEPARTMENTAL  COST  CONFERENCE    495 

and  usually  do  remain  practically  the  same,  the  total  costs 
would  be  reduced  considerably  inasmuch  as  the  special  facili- 
ties, experimental  and  preliminary  expenses  incurred  at  the 
beginning  of  the  contract  would  not  be  incurred  a  second  time. 
In  gathering  cost  statistics,  therefore,  the  normal  costs  should 
always  be  kept  separate  and  distinct  from  the  total  costs  of 
the  contract. 


CHAPTER  XXXI 

COST-PLUS      CONTRACTS  —  MATERIAL,      LABOR, 
AND  EQUIPMENT   ITEMS 

General  Consideration  of  Terms  of  Contract 

As  the  general  principles  of  cost-finding  and  definitions  of 
standard  cost  items  have  been  covered  in  Chapters  I,  II,  and 
III,  the  discussion  in  the  following  two  chapters  is  largely 
confined  to  the  distribution  of  cost  items  according  to  the  terms 
of  cost-plus  contracts.  Not  all  items  are  enumerated,  for  the 
reason  that  some  are  so  technical  in  character  or  are  so  specifi- 
cally related  to  a  particular  contract  as  to  be  of  little  general 
interest.  Those  that  are  taken  up  are  such  as  illustrate  what 
the  author  believes  to  be  the  correct  interpretation  of  the 
terms  of  cost-plus  contracts,  whether  these  be  fully  expressed 
or  only  implied.  These  interpretations  are  not  to  be  applied 
to  any  subcontracts  of  the  prime  contractor  other  than  strictly 
cost-plus  subcontracts.  The  terms  of  the  latter  are.  often  based 
on  material  and  labor  time,  i.e.,  on  the  cost  of  material  and 
a  set  price  per  hour  of  labor  time,  which  hourly  rate  includes 
all  overhead  and  the  profit  on  the  subcontract. 

While  the  classification  of  the  items  in  the  following  chap- 
ters aims  to  group  those  of  a  like  nature  together,  it  will  be 
noted  that  their  treatment  under  cost-plus  contracts  often  dif- 
fers from  their  treatment  under  ordinary  commercial  condi- 
tions. In  government  cost-plus  work,  the  costs  are  interpreted 
according  to  the  provisions  of  the  contract.  This  sometimes 
lists  a  certain  number  of  classifications  and  refers  in  addition 
to  the  pamphlet  "Definition  of  Costs"  issued  by  the  Chief  of 
Ordnance,  War  Department,  under  date  of  June  27,  19 17. 

496 


MATERIAL,   LABOR   AND   EQUIPMENT  497 

Need  of  Special  Rulings 

In  all  cost-plus  contracts  many  items  of  cost  cannot  be 
foreseen  before  work  begins,  either  by  the  contractor  or  the 
buyer.  Therefore,  a  large  number  of  special  items  are  dis- 
cussed in  the  following  pages.  These  items  may  apply  to  any 
exceptional  conditions  which  the  terms  of  the  contracts  do  not 
cover.  For  instance,  in  some  contracts  special  facilities  may  or 
may  not  be  allowed  as  costs;  in  others,  interest  on  investment 
and  working  capital  or  interest  on  motiey  borrowed  by  the  con- 
tractor to  carry  on  the  cost-plus  work  is  allowed;  again,  the 
interest  may  be  limited  to  that  on  working  capital  or  on  money 
borrowed  by  the  contractor  to  finance  the  purchase  of  material 
to  be  used  on  cost-plus  work;  or  interest  may  be  eliminated. 

The  intention  here  is  not  to  make  definite  rules  to  cover 
all  cases,  but  to  illustrate,  so  far  as  possible,  the  treatment  of 
costs  under  cost-plus  contracts  wherever  the  contract  itself 
does  not  specifically  take  care  of  the  items  in  question.  Be- 
fore proceeding  with  the  discussion,  the  author  wishes  to  state 
emphatically  that  so  far  as  is  consistent  with  the  forms  of  cost- 
plus  contracts,  the  distribution  of  costs  between  the  contractor 
and  the  buyer  or  contractee  has  been  made  in  precisely  the 
same  manner  as  it  would  have  been  made  had  the  contractor 
called  him  in  to  make  the  distribution  on  straight-purchase 
price  contracts.  Also,  the  opinions  expressed  herein  are  not 
made  in  any  official  capacity,  but  are  the  personal  opinions  of 
the  author. 

Betterments  and  Equipment 
Treatment  of  Additions  and  Special  Facilities 

Expenditures  for  special  facilities,  which  usually  are  in 
the  nature  of  a  betterment,  may  be  charged  as  cost  when  they 
are  exclusively  employed  on  cost-plus  work,  providing  that  the 
contract  authorizes  the  charge.    In  all  other  cases  they  should 


498  COST-PLUS   CONTRACTS 

be  charged  to  a  Betterment  account  and  be  subject  to  deprecia- 
tion, of  which  the  cost-plus  contracts  would  bear  their  propor- 
tionate share. 

Where  betterments,  additions,  or  other  special  facilities 
are  charged  ioo%  to  cost-plus  contracts,  the  following  facts 
should  be  taken  into  consideration : 

1.  Where  the  betterment,  addition,  or  other  facility  is 

manufactured  in  the  plant  and  not  purchased  from 
outside,  and  may  be  removed  when  work  on  the 
contract  is  completed  without  injury,  such  cost 
should  be  allowed  with  profit  under  a  cost-plus  con- 
tract. 

2.  Where  the  betterment  or  other  facility  is  attached 

to  a  machine  or  a  part  of  the  building  or  connected 
with  a  part  of  the  plant  in  such  a  way  that  its  re- 
moval would  practically  destroy  its  residual  value, 
it  may  be  subject  to  reimbursement  or  compensa- 
tion without  profit. 

Unless  clearly  stated  in  the  contract  itself,  expenditures  of 
the  above  character  should  not  be  treated  as  a  part  of  the 
normal  costs,  but  should  be  reimbursed  and  profit  should  be 
added  only  when  the  betterment  is  manufactured  in  the  plant. 
All  purchases  of  betterments,  where  provided  for  in  the  con- 
tract, should  be  reimbursed  without  profit.  Some  contracts 
do  not  allow  profit  on  increased  or  special  facilities  whether 
purchased  or  manufactured  in  the  plant. 

Where  the  betterment  is  used  exclusively  for  the  benefit 
of  the  cost-plus  contract  and  cannot  be  used  for  any  other 
purposes  in  the  contractor's  business,  either  before  or  after 
the  cost-plus  contract  is  completed,  it  should  be  subject  to  reim- 
bursement with  profit.  On  the  other  hand,  where  the  article 
can  be  used  for  other  purposes,  it  may  become  either  an  asset 
of  the  contractor  subject  to  depreciation,   or  under  certain 


MATERIAL,    LABOR   AND    EQUIPMENT  499 

conditions  a  part  of  the  overhead,;  or  again,  a  certain  arbitrary- 
percentage  of  its  value  may  be  charged  to  both  the  cost-plus 
and  other  contracts.  It  should  always  be  clearly  understood 
that  wherever  the  government  pays  the  full  price  of  any  arti- 
cle, it  becomes  United  States  property, 

Treatment  of  Fixtures  and  Special  Equipment 

When  special  equipment  is  purchased  for  the  needs  of  a 
contract,  the  method  of  charging  it  should  be  given  careful 
consideration.  For  instance,  the  fixtures  employed  in  staging 
shoring,  and  blocking  ships  may  be  used  in  the  constmction 
of  several  vessels.  Such  equipment,  therefore,  should  not  be 
written  off  to  expense  when  purchased,  which  custom  is  fre- 
quently followed  in  ship  yards.  While  it  is  true  that  its  de- 
preciation would  be  considerably  higher  than  on  most  equip- 
ment, nevertheless  it  is  still  as  necessary  a  part  of  the  ship- 
building plant  as  the  wagons,  piles,  planking,  etc.,  are  to  a 
building  contractor  doing  ordinary  construction  work.  The 
opinion  is  here  offered  that  all  expenditures  of  this  character 
should  be  charged  to  cost-plus  work  as  depreciation. 

Office  Furniture  and  Fittings 

Purchases  of  office  furniture,  filing  cabinets,  typewriters, 
addressing  machines,  copying  machines,  adding  machines,  and 
supplies,  which  are  to  be  used  solely  in  connection  with  work 
on  cost-plus  contracts,  should  not  be  treated  as  normal  costs 
but  as  a  cost  subject  to  reimbursement  without  profit. 

Rebuilding,  Renovating,  and  Equipment  Charges 

Any  expenditures  on  rebuilding,  alterations,  renovating, 
and  removing  machinery  and  equipment,  which  are  incurred 
for  the  benefit  of  the  plant  as  a  whole  and  which  cannot  be 
considered  as  an  asset  increase,  should  be  treated  as  a  deferred 
overhead  cost  unless  expressly  provided  for  in  the  contract 


500  COST-PLUS   CONTRACTS 

as  increased  facilities,  in  which  case  the  cost  may  be  allocated 
directly  to  the  contract  on  which  incurred.  If  the  expense  in 
question  is  a  direct  overhead  charge  to  a  specific  contract,  it 
should  not  be  charged  to  general  overhead  for  distribution  over 
all  contracts  covering  items  of  the  same  character.  Under  these 
circumstances  several  accounts  or  classifications  should  be 
made,  namely,  one  account  chargeable  directly  to  cost-plus  con- 
tracts, another  chargeable  directly  to  other  contracts,  and  a 
third  to  be  a  general  overhead  item.  Inasmuch  as  certain  ex- 
penses of  this  kind  may  be  incurred,  at  times  both  for  the  bene- 
fit of  the  cost-plus  contracts  and  other  contracts,  no  share  of 
expenditures  for  the  adjustment  of  equipment,  other  than  that 
directly  affecting  cost-plus  contracts,  should  be  charged  thereto. 
When  changes,  improvements,  or  additions,  whether  of 
a  permanent  nature  or  for  temporary  use,  are  to  be  made  to 
machinery,  plant,  or  equipment,  the  questions  of  how  the  cost 
is  to  be  applied  and  whether  the  additions  are  to  belong  to  the 
contractor  or  the  buyer  should  be  determined  before  the  cost- 
plus  work  begins. 

Freight  or  Express  on  Equipment 

If  any  equipment  used  on  the  contract  is  provided  by  the 
contractee  or  buyer,  all  freight  and  express  charges  and  the 
expenses  of  its  installation  are  chargeable  ioo%  as  part  of 
the  overhead  cost  of  the  contract  work.  If,  on  the  other  hand, 
the  contractor  himself  buys  equipment  or  machinery,  the 
freight,  express,  and  other  expenses  should  be  charged  to 
plant  investment  and  not  to  overhead. 

Setting  up  Machines 

Any  costs  incurred  in  setting  up  machines  are  chargeable 
directly  to  the  specific  contract  for  which  the  machinery  is 
installed.  If  a  machine  works  on  various  contracts,  the  charge 
would  be  to  overhead. 


MATERIAL,  LABOR  AND   EQUIPMENT  501 

Monorail  System 

A  conveyor  might  be  installed  strictly  for  the  needs  of 
cost-plus  contracts.  If  so  situated  that  it  could  be  used  on 
ordinary  commercial  work  either  before  or  after  the  comple- 
tion of  the  contract,  it  would  be  an  addition  to  the  plant  assets 
and  subject  to  depreciation.  Should  the  system  be  so  placed 
that  it  could  not  be  used  on  cost-plus  work  without  removal  to 
another  part  of  the  plant,  then  the  estimated  cost  of  this  re- 
moval should  be  ascertained  and  should  be  charged  100% 
as  overhead  against  the  contract  for  reimbursement  with 
profit,  but  not  to  be  included  as  normal  cost. 

Installing  Workmen's  Washing  Facilities 

Items  of  such  character  as  workmen's  washing  facili- 
ties should  be  charged  as  deferred  overhead  expense  and 
treated  in  the  same  manner  as  betterments. 

Housing  of  Laborers 

Expenses  incurred  in  connection  with  the  housing  of 
workmen  (excluding  the  purchase  of  land,  the  construction 
of  buildings,  or  other  expenditures  of  an  asset  nature)  may  be 
treated  as  overhead,  from  which  any  income  received  from 
such  assets  should  be  deducted.  The  asset  expenditures  may 
be  amortized  if  authorized  by  the  buyer. 

Repairs,  Renewals,  and  Replacements 

Method  of  Treatment 

Repairs,  renewals,  and  replacements  sometimes  require 
special  treatment.  If  the  buyer  has  supplied  the  contractor 
with  machinery  or  has  reimbursed  him  for  its  purchase  or  for 
the  erection  of  buildings,  the  ownership  of  such  property  is 
vested  in  the  buyer.  Wherever  such  expenditures  are  made  di- 
rectly and  only  for  cost-plus  work,  they  become  a  direct  charge ; 


502  COST-PLUS   CONTRACTS 

when  used  for  commercial  work  as  well,  the  charge  should  be 
made  to  overhead.  The  cost-plus  contract  should  bear  no  part 
whatever  of  the  cost  of  the  contractor  s  machinery  if  used  by 
him  for  commercial  work  only. 

Wherever  replacements  of  machinery  are  made  necessary 
by  cost-plus  work  and  a  purchase  is  made,  the  contractor  is 
entitled  to  reimbursement,  but  profit  should  not  be  added.  If 
any  laborer  is  employed  in  connection  with  replacements,  he 
should  be  allowed  a  profit  on  the  labor.  If  the  machinery  is 
manufactured,  a  profit  should  also  be  allowable  on  material. 

Extraordinary  Repairs 

A  distinction  should  be  made  between  the  ordinary  up- 
keep of  a  plant,  consisting  of  the  repairs  and  replacements  due 
to  wear  and  tear,  and  extraordinary  repairs  which  may  be 
regarded  at  times  as  a  betterment.  Changes  in  equipment  or 
the  moving  and  rearranging  of  a  plant  are  often  included  as 
ordinary  repairs.  Betterments  such  as  putting  in  extra  doors, 
putting  on  a  new  roof,  making  material  changes  in  the  con- 
struction of  a  building,  etc.,  are  charged  at  times  to  an  ordinary 
repair  account  but  should  be  charged  as  extraordinary  repairs. 

Where  betterment  items  are  not  charged  against  deprecia- 
tion reserve,  and  the  value  of  an  equipment  is  held  intact  as  an 
asset,  subject  only  to  the  regular  rates  of  depreciation,  and  the 
betterment  in  question  does  not  materially  enhance  the  value 
of  the  equipment,  such  items  may  be  chargeable  as  extraordi- 
nary repairs.  These  should  constitute  a  deferred,  charge,  and 
be  written  off  or  amortized  during  a  period  of  from  one  to 
three  years.  The  amount  written  off  should  form  a  part  of 
the  overhead  expense,  unless  specially  authorized  and  approved 
by  the  buyer  and  used  only  in  the  interest  of  his  contracts.  In 
this  case,  the  amount  would  be  chargeable  to  such  contract 
as  direct  expense,  providing  the  contractor  does  not  in  any 
way  participate  in  the  value  of  such  items. 


MATERIAL,   LABOR   AND    EQUIPMENT  503 

Material  and  Supplies  Items 
Material  Cost 

Cost-plus  contracts  usually  specifically  state  that  the  ac- 
tual cost  of  material  only  shall  be  charged  thereto.  Should  the 
contractee  or  buyer,  for  instance,  buy  raw  material  at  a  bar- 
gain, he  could  not,  under  the  terms  of  the  contract,  charge  the 
contractor  for  a  greater  sum  than  was  paid  for  it;  and  on  the 
other  hand,  the  contractor  who  bought  material  under  the 
market  could  not  charge  the  market  price  to  cost-plus  contracts. 
The  actual  purchase  price  in  each  case  would  have  to  be  used. 

Supplies 

Supplies  are  usually  regarded  as  an  overhead  expense, 
but  more  accurate  costs  would  be  obtained  if  they  were  divided 
into  direct  supplies  chargeable  against  current  contracts  and 
indirect  supplies  chargeable  to  overhead,  when  the  latter  could 
not  be  allocated  to  any  particular  contract, 

Pricing  of  Material  and  Supplies 

Where  material  is  bought  at  different  times  and  at  vari- 
ous prices  and  it  is  not  practicable  to  use  a  definite  purchase 
figure,  an  average  price  should  be  computed  on  all  material 
put  into  process,  whether  owned  by  the  buyer  or  the  contractor. 
If  the  average  price  does  not  balance  correctly  at  inventory 
periods  with  the  value  of  the  amount  on  hand,  any  discrepancy 
should  be  adjusted,  when  possible,  by  charging  or  crediting 
the  contract  involved;  if  this  cannot  be  ascertained,  the  charge 
or  credit  should  be  made  to  overhead  expense. 

Shortages,  Overs,  and  Obsolete  Material 

The  payments  made  by  the  contractor  for  purchases 
should  be  recorded  and  charged  to  the  contracts  affected.  To 
take  care  of  any  shortages  and  overs,  it  is  advisable  to  open 


504  COST-PLUS   CONTRACTS 

an  account  called  "Over,  Short,  and  Damage,"  charging  it 
with  shortages  and  crediting  it  with  overs  or  any  claim  paid 
for  shortages.  The  balance  of  the  account  would  be  debited 
or  credited  to  either  overhead  expense  or  the  contract  affected, 
as  the  case  might  require. 

Obsolete  stores  should  not  be  included  as  a  cost  unless 
they  represent  losses  on  purchases  to  be  used  on  cost-plus 
work  and  made  since  the  date  of  the  contract 

Inventory  Adjustments 

When  any  difference  between  the  book  and  the  physical 
inventory  of  materials  and  supplies  which  have  been  used  on 
cost-plus  contracts  cannot  be  located,  such  difference  may 
either  be  charged  or  credited  to  overhead  expense,  as  the  case 
may  require.  This  rule  should  apply  only  to  normal  or  small 
differences,  as  any  large  discrepancy  would  necessarily  have 
to  be  accounted  for, 

Drayage 

While  drayage  is  an  ordinary  item  of  expense,  a  contract 
for  material  may  state  the  purchase  price  plus  the  cost  of 
drayage.  Therefore  it  would  seem  that  the  word  "drayage" 
should  be  interpreted  so  that  no  misunderstanding  may  arise  in 
its  application  to  cost.  The  recognized  commercial  use  of 
this  term  implies  the  hauling  of  freight  or  express  from  or  to 
a  depot,  but  it  does  not  cover  hauling  of  every  description, 
such  as  the  transfer  of  material  from  one  part  of  a  plant  to 
another. 

Packing  and  Packing  Supplies 

Boxes,  lumber,  nails,  containers,  strapping,  and  miscel- 
laneous packing  supplies  as  well  as  the  packing  labor  incurred 
on  cost-plus  work  may  be  included  as  part  of  the  overhead, 
which  should  receive  credit  for  any  salvage. 


MATERIAL,   LABOR   AND   EQUIPMENT  505 

Transfers  of  Inventory  Items  Between  Factories 

When  for  the  sake  of  convenience  raw  material  is  trans- 
ferred from  one  contractor  to  another  working  on  cost-plus 
contracts,  the  purchase  price  only  should  be  charged.  For 
instance,  it  would  clearly  be  unfair  to  the  United  States  Gov- 
ernment for  Contractor  A  to  add  10%  to  material  transferred 
from  Contractor  B,  even  if  A's  contract  allows  this  10%  on  all 
material  purchases  used  on  government  work.  Contractor 
B  naturally  expects  his  10%,  and  if  A  charges  10%,  then 
10%  would  be  charged  twice  on  the  same  material.  There- 
fore the  government  would  be  penalized  to  the  extent  that  it 
could  go  into  the  open  market  and  buy  the  same  material  sup- 
plied to  Contractor  B  for  the  price  paid  by  Contractor  A. 
On  the  other  hand,  when  part-finished  or  finished  components 
are  transferred  from  one  contractor  to  another,  it  is  logical 
for  the  contractor  making  the  shipment  to  add  his  10%  profit 
inasmuch  as  he  has  used  his  plant  and  facilities  in  their  manu- 
facture. The  receiver  of  the  parts  would  also  add  10%  profit 
in  view  of  the  fact  that  the  components  represent  a  purchase 
which  will  be  used  in  manufacturing. 

It  should  be  noted  that  10%  is  used  as  an  illustration 
but  it  is  not  to  be  assumed  that  all  cost-plus  contracts  are 
necessarily  based  on  10%  plus. 

If  the  United  States  Government  purchases  material  and 
components  at  a  given  price  from  a  foreign  government  with 
unfinished  contracts  in  this  country,  the  price  of  the  materials 
or  components  may  include  interest  or  carrying  charges.  This, 
however,  does  not  add  to  their  value.  Therefore,  the  con- 
tractor who  takes  over  such  materials  and  parts  should  add 
10%  to  the  purchase  price  only  and  not  to  carrying  charges. 

Spare  Parts 

In  some  cost-plus  contracts  a  fixed  profit  is  allowed  on 
each  unit  of  production.  If  the  contract,  as  frequently  hap- 


5o6  COST-PLUS   CONTRACTS 

pens,  covers  the  manufacture  of  certain  machines,  spare  parts 
will  probably  be  required  from  time  to  time  and  the  contract 
may  not  specify  definitely  their  number  or  kinds.  For  in- 
stance, a  clause  in  a  certain  contract  provides  a  profit  of  $25 
for  each  machine  delivered,  90%  of  this  amount,  namely 
$22.50,  being  payable  upon  delivery  and  acceptance,  the  re- 
rnainder  upon  the  completion  of  the  contract.  Another  clause 
of  the  same  contract  provides  that  upon  the  delivery  of  spare 
parts  which  amount  to  30%  of  the  total  cost  of  each  completed 
machine,  $7.50  profit  will  be  added.  It  is  noted  that  this 
is  for  the  same  proportion  as  the  $22.50  in  the  first-mentioned 
clause  is  to  $25,  or  90%.  In  other  words,  the  same  percent- 
age is  held  out  for  final  payment  upon  the  completion  of  the 
contract  for  spare  parts  as  for  the  completed  contract  for  the 
machine. 

In  order  to  figure  out  the  amount  due  the  contractor  on 
spare  parts,  it  is  necessary  to  consider  the  following: 

1.  Ascertain  the  total  cost  upon  which  a  profit  of  $25 

is  given. 

2.  Calculate  the  percentage  of  the  spare  parts  cost  to  the 

total  cost. 

3.  Calculate  the  percentage  of  $25  profit  to  the  total  cost. 

4.  Use  this  last  percentage  to  multiply  the  cost  of  the 

spare  parts  in  order  to  obtain  the  amount  of  profit 
to  be  paid  on  the  same,  90% — which,  however, 
is  all  that  would  be  payable  until  the  completion 
of  the  contract. 

In  the  above  example  care  should  be  exercised  to  see 
that  the  accumulated  profit  payable  on  the  spare  parts  does  not 
at  any  time  exceed  $22.50,  which  represents  the  profit  payable 
on  the  completed  article;  taking  into  consideration,  however, 
that  this  will  apply  where  the  spare  parts  represent  an  equal 
number  of  completed  articles  or  the  proper  proportion  thereof. 


MATERIAL,  LABOR  AND  EQUIPMENT  507 

T001.S 

Distinction  Between  Tools  and  Machines 

Manufacturers  have  not  always  a  clear  conception  of  the 
correct  classification  of  tools  by  their  names,  and  this  results 
in  confusion  when  charging  their  cost  to  contract  work.  A 
machine  is  sometimes  classed  as  a  tool,  and  vice  versa.  A 
machine  is  always  an  asset  when  a  pulley  or  belt  is  attached 
to  it  for  the  purpose  of  running  it  by  power  of  some  kind 
and  without  which  it  cannot  be  operated.  Machinery  which 
is  not  operated  by  a  pulley  or  belt  is  a  tool  of  some  kind.  Gen- 
erally speaking,  tools  used  in  actual  operation  are  classified  as 
small  tools  and  those  used  for  the  purpose  of  holding  another 
tool  in  place  are  classified  as  machine  tools.  This  applies 
to  tools  generally,  excepting  chucks,  fixtures,  gages,  trans- 
missions, etc. 

All  attachments,  holders,  etc.,  which  are  bought  with  a 
machine  and  form  part  of  its  first  cost  should  be  regarded  as 
assets  in  connection  with  the  machine.  This  classification, 
however,  does  not  include  special  holders  and  attachments 
exclusively  used  for  special  work  and  which  at  the  end  of 
such  work  become  useless. 

Asset  Tools  and  Perishable  Tools 

For  cost  purposes  tools  may  be  divided  into  two  classes : 
namely,  asset  tools  and  perishable  tools.  These  may  be  sub- 
divided in  each  case  into  standard  tools  and  special  tools. 

All  asset  tools — other  than  any  special  tools  used  on 
special  work  and  chargeable  under  the  terms  of  a  contract 
directly  to  such  special  work — should  be  treated  as  an  asset 
of  the  contractor,  subject  to  depreciation.  Perishable  tools 
of  a  standard  nature  should  be  charged  as  an  overhead  ex- 
pense, for  the  reason  that  it  is  impracticable  to  limit  their  use 
on  any  particular  contract.     Only  those  perishable  tools  which 


5o8  COST-PLUS  CONTRACTS 

are  special  and  cannot  be  used  in  connection  with  any  other 
contract  work  are  chargeable  to  such  special  contracts. 

Scrap  Value  of  Tools 

Care  should  be  taken  to  see  that  a  contract  receives  its 
proper  proportion  of  the  scrap  value  of  all  tools  used  upon  it. 
If  they  are  asset  tools,  the  cost  of  their  repairs  and  mainte- 
nance should  be  charged  and  their  scrap  value  credited  to  over- 
head. In  the  same  way,  if  the  cost  of  any  tools  has  been 
charged  to  overhead,  their  scrap  value  should  also  be  credited 
thereto.  If  a  special  contract  is  charged  with  the  full  value 
of  any  tools,  it  should  be  credited  with  ioo%  of  their  scrap 
value. 

Classification  of  Tools 

While  the  general  distinction  between  an  asset  and  perish- 
able tool  is  based  on  the  life  of  the  tool,  it  is  somewhat  difficult 
to  determine  whether  it  is  an  asset  or  of  a  perishable  nature 
from  its  name,  as  the  wear  of  a  tool  depends  entirely  upon 
the  material  from  which  it  is  made  and  the  use  to  which  it  is 
put.  An  attempt  should,  however,  be  made  to  classify  tools 
into  several  divisions  for  the  purpose  of  determining  depre- 
ciation rates.  For  instance,  tools  which  are  quickly  worn  out 
and  which  last  from  a  few  hours  to  not  more  than  two  months, 
would  all  be  chargeable  either  to  overhead  or  to  a  particular 
contract  and  would  therefore  have  no  depreciation  rate.  Tools 
lasting  from  two  months  to  a  year  could  be  classed  as  asset 
tools  and  depreciated  at  the  rate  of  io%  per  month.  Tools 
lasting  from  two  to  three  years  should  be  charged  off  at  the 
rate  of  33  1/3%  per  year;  but  all  tools  which  are  part  of  a 
machine,  as  stated  on  the  preceding  page,  should  be  in- 
cluded in  the  rate  of  depreciation  allowed  on  that  particular 
machine. 

The  correct  classification  of  a  tool,  either  as  an  asset  or 


MATERIAL,   LABOR   AND   EQUIPMENT 


509 


as  an  item  of  a  perishable  nature,  is  important  in  connection 
with  charging  its  cost  to  a  particular  contract — unless  the 
value  of  the  tool  can  be  ascertained  at  the  end  of  the  contract 
in  question.  Therefore,  it  is  recommended  that  an  inventory 
of  the  valuation  of  tools  should  be  taken  at  the  end  of  any 
cost-plus  contract  and  the  value  of  the  inventory  credited  in  its 
proper  proportion  to  the  contract,  while  the  balance  is  held  as 
a  deferred  charge  against  other  contracts.  This  applies  to  all 
tools  which  have  been  charged,  either  in  full  to  a  government 
contract,  or  in  full  to  the  overhead  in  which  the  government 
contract  would  participate. 

A  classification  of  tools  is  here  appended  without  any 
reference  to  the  life  of  a  particular  tool.  This  list  was  com- 
piled at  a  conference  held  with  the  leading  tool  manufacturers 
of  the  country  for  the  purpose  of  determining  from  the  name 
and  nature  of  a  tool  as  to  whether  or  not  it  should  be  classed 
as  an  asset  or  a  perishable  article.  While  it  is  not  intended 
to  present  this  as  a  complete  list,  practically  all  tools  may  be 
classified  in  this  way. 


Asset  Tools 


Back  rests  for  swing  tools 

Benches 

Bench  centers 

Calipers 

Chucks 

Chucks  for  screw  machines 

Chucks  for  special  machines 

Countershafts 

Cutting  attachments 

Depth  gages 

Die  holders 

Drilling  attachments 

Feed  attachments 

Fixtures: 

Breaching 

Edging 

Handmilling 

Milling 

Rolling 


Splining 

Stamping 

Tapping 
Floating  holders 
Forming  tool  holders 
Gages 

Gear  cutting  attachments 
Gear  teeth 
Hangers 
Index  centers 
Indicators 
Knurl  holders 
Micrometers 
Milling  attachments 
Plain  pulleys 
Plain  vises 

Planer  and  shaper  gages 
Plates 
Plugs 


5IO 


COST-PLUS   CONTRACTS 


Asset  Tools — Continued 


Plungers 
Pointing  tools 
Pointing  tool  holders 
Profiles 
Prongs 


Pulleys 
Saw  frames 
Slotting  attachments 
Special  tools  and  holders 
Snaps 


Perishable  Tools 


Arbors 

Box  tools  for  screw  machines 

Broaches — for  key  way 

Bushing 

Cutting    and    special    holes — sim- 
ilar to  splitting 

Chisels 

Circular  cut-off  tools 

Circular  form  tools 

Circular  thread  tools 

Collet  blanks 

Counter  bores 

Countersinks 

Cutters 

Dies — threading — all  sizes 

Die  holders 

Drill  tips 

Drill  shanks 

Drills — all  sizes 

Edging  cutters 

End  mills 

Files — all  kinds  and  sizes 

Forming  tools 

Grinding  wheels — all  kinds  and 
sizes 

Handmilling  cutters — numerous 

Inscription  rolls 

Jigs 


Milling  cutters — numerous  shapes, 
sizes,  and  cutting  edges 

Mallets 

Mandrels — sometimes  called  arbors 

Paper  gages 

Punches  and  dies 

Polishing  holders 

Reamers — hand  and  machine 

Reamer  shanks 

Roughing  tools 

Slot  cutters 

Screw  drivers 

Slotting  saws — hackley,  circular 

Splitting  tools — similar  to  broaches 

Stamps 

Stamps — marking 

Steel  sockets 

Taps 

Threading  dies 

Thread  gages 

Turtting  tools — numerous  shapes 
and  cutting  edges 

Tweezers 

Twist  drills 

Wire  gages 

Wrettches — all  kittds,  shapes,  and 
sizes 


Handling  and  Storing  of  Tools 

All  tools  of  whatever  nature,  whether  manufactured  or 
bought,  should  go  into  a  storeroom  where  a  proper  record  is 
kept  of  their  receipt.  None  should  be  charged  to  any  con- 
tract until  requisitioned  from  the  storeroom,  and  no  tool 
should  be  issued  to  replace  another  until  its  scrap  value  has 


MATERIAL,    LABOR,    AND    EQUIPMENT 


511 


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512 


COST-PLUS   CONTRACTS 


been  accounted  for.  When  tools  are  chargeable  to  a  particular 
contract  a  distinguishing  mark  should  be  stamped  on  them  be- 
fore they  are  taken  into  stores. 

Accounting  for  Tools 

A  method  of  recording  the  number  of  tools  received, 
issued,  in  use,  and  scrapped  is  shown  in  Form  102.  On  this 
single  form  all  the  details  are  given  as  to  the  number  of  a  cer- 
tain kind  of  tool  chargeable  to  a  particular  contract. 

Asset  Tools  Charged  at  Cost 

All  tools  manufactured  or  bought  by  the  contractor  which 
are  to  be  used  exclusively  on  cost-plus  contracts  and  are  to  be 
owned  by  the  buyer  should  be  treated  as  a  cost  against  such 
contract. 

Perishable  Tools 

In  some  plants  it  is  the  custom  to  add  an  arbitrary  per- 
centage on  labor  to  cover  the  overhead  on  tools — which  per- 
centage in  many  cases  is  much  higher  than  the  overhead  rate 
finally  determined.  The  difference  is  often  adjusted  by  cred- 
iting General  Factory  Overhead  account,  which  automatically 
reduces  the  amount  for  distribution.  This  method  is  unsound 
in  principle  and  should  not  be  allowed. 

All  consumable  tools  used  on  cost-plus  contract  work  are 
chargeable  as  indirect  material.  This  includes  jigs,  dies, 
gages,  and  special  tools  needed  for  a  particular  job. 

When  perishable  tools  are  charged  to  cost-plus  work,  full 
credit  for  any  residual  or  scrap  value  should  be  given. 

Old  Tools  Remade  or  Salvaged 

It  frequently  happens  that  special  tools  made  for  one  con- 
tract may  be  salvaged  and  used  on  another.  For  example, 
some  tools  may  only  need  to  be  sharpened  or  cut  down  to 


MATERIAL,    LABOR     AND    EQUIPMENT  513 

become  practically  as  good  as  new.  In  calculating  their  cost 
25%  should  be  added  to  the  material  cost  or  the  market  value 
of  the  raw  material  from  which  the  tool  is  made,  to  cover 
the  scrap  produced  when  originally  manufactured.  To  this 
should  be  added  the  labor  already  expended,  from  which 
should  be  deducted  the  new  labor  cost  required  to  salvage  the 
tool.  The  overhead  added  should  be  based  on  the  labor  actu- 
ally employed  in  the  changing  of  the  tool. 

This  method  is  a  tentative  one  and  may  be  used  if  the 
actual  cost  of  the  tools  cannot  be  ascertained.  Whatever 
method  is  used,  the  cost  should  not  exceed  the  price  of  a  new 
tool. 

Repairs  or  Replacement  of  Tools 

Wherever  a  cost-plus  contract  provides  for  increased  fa- 
cilities of  the  plant,  all  tools,  including  jigs,  fixtures,  and  small 
tools  required  to  operate  a  single  machine  or  a  series  of  ma- 
chines, are  to  be  considered  as  increased  facilities.  Any  neces- 
sary repairs  or  replacements  of  the  original  equipment  should 
be  regarded  as  indirect  expense  and  charged  to  normal  cost, 
like  all  other  classes  of  indirect  material, 

Identification  of  Tools  Used 

Standard  tools  made  or  purchased  for  special  work  may 
be  used  on  various  contracts,  in  which  case  it  is  a  difficult 
matter  to  check  up  their  use  and  see  that  the  cost-plus  con- 
tracts receive  adequate  scrap  value.  Any  special  or  salvaged 
tools  to  be  charged  to  specific  cost-plus  work  should  be  stamped 
for  identification.  It  is  further  recommended  that  all  salvaged 
tools  before  going  into  the  machine  tool  department  to  be  re- 
worked on,  should  pass  through  the  tool  room  and  a  record 
be  made  of  the  same  to  prevent  them  from  being  recharged  at 
tool  cost. 


514  COST-PLUS    CONTRACTS 

Treatment  When  Basis  of  Contract  is  Changed 

In  some  cases  a  contract  may  be  changed  from  a  straight- 
price  to  a  cost-plus  base,  in  which  case  any  unconsumed  tools 
and  material  belong  to  the  contractor  and  could  be  used  on 
the  new  cost-plus  work.  So  far  as  the  material  is  concerned 
the  change  presents  no  difficulty.  Any  perishable  tools  on 
hand,  however,  may  have  been  partly  used,  in  which  case  they 
should  be  charged  to  the  cost-plus  contract  at  their  cost  value 
less  depreciation  for  use,  which  might  run  from  5%  to  95%. 
From  the  author's  experience  it  would  seem  that  unless  it  is 
practicable  to  appraise  each  tool  separately,  a  depreciation  of 
50%  should  be  taken  ofif  their  total  cost  before  charging  them 
to  a  cost-plus  contract. 

Overtime  and  Idle  Time 
Overtime 

All  productive  overtime  should  be  treated  as  direct  labor 
and  should  not  form  a  part  of  the  overhead  expense. 

Idle  Time  on  Operation 

Time  is  frequently  lost  by  productive  workmen  when  the 
machinery  needs  to  be  adjusted  or  the  operating  departments 
are  not  properly  balanced.  That  is  to  say,  one  department 
may  not  be  able  to  supply  the  next  department  in  that  line  of 
work  with  sufficient  semi-finished  material  to  keep  it  fully  em- 
ployed. Where  idle  time  is  due  to  these  causes  and  the  work- 
men involved  cannot  be  used  on  other  jobs,  the  cost  should  be 
charged  to  the  particular  contract  on  which  the  men  are  en- 
gaged, but  no  overhead  should  be  added  to  the  lost  time.  Of 
course,  idle  time  which  is  charged  in  full  to  a  particular  con- 
tract should  be  confined  to  workmen  who  are  engaged  almost 
continuously  thereon.  The  idle  time  of  men  who  are  only 
temporarily  employed  on  the  job  should  not  be  charged  as  a 
direct  cost  but  as  overhead. 


MATERIAL,    LABOR    AND    EQUIPMENT  515 

Where  the  exact  contract  charge  for  the  idle  time  which 
is  allowable  as  cost  cannot  be  determined  definitely,  it  should 
be  treated  as  regular  overhead  to  be  distributed  over  all  con- 
tracts. The  idle  time  of  indirect  workers  or  foremen  em- 
ployed wholly  on  cost-plus  work  would  only  be  chargeable  as 
a  direct  cost  if  such  employees  were  compelled  to  be  laid  off 
while  work  on  the  contract  was  temporarily  suspended,  due  to 
the  fault  of  the  buyer  or  to  unavoidable  working  conditions. 

Waiting  Time  as  a  Deferred  Charge 

Attention  is  here  directed  to  the  treatment  of  time  lost 
while  the  men  are  waiting  for  the  contract  work  to  begin.  In 
this  case  the  charge  should  not  constitute  a  direct  cost  to  any 
contract,  but  should  be  deferred  to  be  spread  over  all  contracts 
at  the  proper  time.  Furthermore,  no  overhead  should  be 
added  to  this  idle  time,  as  ordinary  shop  overhead  expense  is 
not  incurred  unless  the  men  are  working.  The  hiring  of  men 
preparatory  to  beginning  work  on  a  contract  is  purely  an  or- 
ganization expense,  and  as  such  constitutes  a  deferred  charge 
to  the  contracts  when  work  is  actually  in  process — which 
amount  may  be  spread  over  several  months. 

The  hiring  of  men  who  are  paid  to  hold  themselves  ready 
to  undertake  contract  work  promptly  and  expeditiously,  re- 
sults in  a  quicker  turnover  of  capital  than  if,  when  work  is 
waiting  for  them,  production  is  delayed  until  they  can  be  found. 
Hence,  profits  are  increased  by  this  precaution.  For  instance, 
when  the  hiring  of  men  is  a  preparatory  precaution  for  the 
purpose  of  pushing  the  production  of  munitions  or  other  im- 
portant governmental  work,  the  forethought  of  the  manufac- 
turer naturally  results  in  larger  profits  to  him.  Therefore,  in 
such  a  case  waiting  time  should  be  treated  as  a  deferred  charge 
to  be  distributed  over  the  cost-plus  and  other  contracts,  and 
would  only  be  entirely  chargeable  to  cost-plus  work  when  the 
expenditure  was  authorized  by  the  buyer. 


CHAPTER  XXXII 

COST-PLUS    CONTRACTS— EXPENSE   AND 
OVERHEAD   ITEMS 

Distribution  of  Overhead 

Direct  and  Indirect  Distribution 

Wherever  the  distribution  of  overhead  is  based  on  the 
direct  labor  hour,  a  clear  distinction  should  be  made  between 
the  labor  hours  chargeable  to  an  operation  and  those  charge- 
able directly  to  a  contract  which  may  not  necessarily  be  direct 
labor.  In  other  words,  direct  labor  should  always  be  defined 
as  productive  labor  in  the  sense  that  it  is  directly  applied  to 
some  operation.  If  only  one  contract  is  being  worked  on  in 
a  particular  department,  the  common  practice  is  to  charge  it 
with  1 00%  of  the  departmental  labor  including  the  indirect 
labor.  But  where  overhead  has  to  be  distributed  according 
to  the  productive  labor  method,  indirect  labor  should  never  be 
used  as  a  factor  in  the  distribution,  even  though  such  labor 
may  be  chargeable  in  full  to  a  single  contract. 

Distribution  Over  Periods  of  Less  Than  a  Month 

If  the  work  on  a  cost-plus  contract  starts  on  the  fifteenth 
day  of  the  month,  the  direct  labor  is  chargeable  for  only  one- 
half  of  the  month  while  the  overhead  expenses  would  cover 
the  complete  month.  Under  these  circumstances  it  would  be 
equitable  to  base  the  distribution  and  charges  to  the  cost-plus 
contract  on  only  one-half  of  overhead  and  one-half  of  the  pro- 
ductive labor  on  other  contracts.  Other  broken  periods 
should,  of  course,  be  charged  proportionately  to  the  time  spent 
upon  the  work. 

S16 


EXPENSE  AND  OVERHEAD  ITEMS        517 

Overhead  on  Bulk  Products 

The  best  method  of  distributing  expenses  over  a  prod- 
uct manufactured  in  bulk  is  on  the  basis  of  the  number  of 
pounds,  tons,  gallons,  or  other  units  of  production  delivered 
during  the  month  on  cost-plus  and  other  contracts. 

Deferred  Overhead  Charges 
Preliminary  Expenses 

On  many  contracts  considerable  preliminary  work  often 
has  to  be  done.  For  instance,  the  job  may  require  that  ex- 
periments be  made,  drafting  work  prepared,  and  special  tools 
be  manufactured.  If  expenditures  for  work  of  this  character 
were  charged  to  overhead  at  the  time  they  were  incurred,  the 
contracts  would  bear  a  much  larger  proportion  of  the  overhead 
than  would  rightfully  belong  to  them,  especially  as  part  of 
these  preliminary  expenses  would  he  chargeable  to  subsequent 
periods.  Therefore  it  would  seem  best  to  defer  the  distribu- 
tion of  such  expenses  until  a  later  period,  especially  if  over- 
head is  distributed  on  the  productive  labor  plan,  as  labor  on 
the  contract  during  the  first  period  may  be  inconsiderable. 

Deferred  Expenditures 

Any  general  expenditures — such  as  would  be  Incurred  by 
moving  benches  or  a  row  of  lights — which  are  not  chargeable 
to  current  repairs  and  cannot  be  considered  as  an  asset  increase, 
and  which  in  consequence  neither  enter  into  production  nor 
increase  the  salable  value  of  the  plant,  would  not  be  acceptable 
if  charged  in  full  to  cost-plus  contracts.  Such  expenditures 
are  chargeable  to  deferred  overhead  and  not  to  capital  account 
under  ordinary  commercial  conditions.  Therefore,  if  they  are 
incurred  on  cost-plus  work,  but  are  advantageous  to  the  con- 
tractor before  or  after  its  completion,  they  should  be  treated 
as  deferred  overhead  expenses  and  spread  over  several  months. 


5i8  COST-PLUS   CONTRACTS 

Administrative  Expenses 
Method  of  Treatment 

Under  ordinary  manufacturing  conditions,  administrative 
expenses  are  prorated  over  the  cost  of  production  and  are  not 
applied  to  the  selHng  end  of  the  business.  Under  cost-plus 
contracts  this  method  would  not  be  equitable,  in  view  of  the 
fact  that  administrative  or  any  general  management  expense 
would  apply  equally  as  well  to  the  purchasing  and  sales  depart- 
ments as  to  the  manufacturing  departments,  and  on  govern- 
ment cost-plus  contracts  selling  expenses  are  not  allowed  as  a 
cost.  Therefore,  a  fair  proportion  of  the  administrative  ex- 
pense should  first  be  prorated  over  the  manufacturing,  selling, 
and  purchasing  departments.  That  portion  charged  to  manu- 
facturing and  purchasing  would  be  prorated  over  the  cost  of 
production,  but  the  portion  charged  to  selling  would  be  in- 
cluded in  selling  expense,  which  is  not  charged  to  cost-plus 
work. 

That  part  of  the  administrative  expenses  which  applies  to 
production  may  be  equitably  distributed  over  all  contracts  on 
the  basis  of  prime  cost,  or  on  total  cost.  This  last  method  is 
usually  to  be  preferred  when  the  distribution  is  first  made  be- 
tween different  plants  owned  by  the  contractor. 

Where  a  concern  owns  dwelling  houses  and  investments 
of  a  like  character,  which  entail  a  certain  amount  of  super- 
vision, a  portion  of  the  administration  expenses  should  be 
chargeable  to  the  carrying  on  of  such  investments.  These 
charges  have  no  bearing  whatever  on  the  cost  of  production. 

Excessive  Salaries 

In  the  distribution  of  administrative  expenses,  the  ques- 
tion as  to  whether  certain  salaries  are  excessive  or  not  often 
arises.  While  it  may  be  impossible  to  state  what  salaries 
should  be  allowed,  the  matter  should  receive  careful  attention 
by  the  officials  of  a  company  in  the  conduct  of  their  business 


EXPENSE  AND  OVERHEAD  ITEMS        519 

wherever  a  large  advance  appears  in  the  salaries  paid  during 
one  year  over  those  of  another,  especially  when  cost-plus  con- 
tracts are  being  worked  on.  The  suggestion  is  here  offered 
that  the  practice  of  increasing  salaries  to  the  point  where  they 
seriously  encroach  upon  current  profits  as  compared  with  those 
distributed  in  previous  years,  should  be  discouraged.  It  is 
reasonable  to  suppose  that  if  an  executive  is  receiving  a  salary 
of  $25,000  a  year  and  the  profits  earned  by  the  business  amount 
to  12%  on  the  capital  invested,  he  would  not  be  entitled  to 
double  this  amount  if  the  effect  of  the  increase  of  $25,000  were 
to  reduce  the  per  cent  of  earnings  on  the  capital. 

Salaries  Paid  After  Termination  of  Employment 

While  salaries  paid  after  termination  of  employment  are 
sanctioned  by  business  custom,  they  should  not  be  regarded  as 
a  cost  for  distribution  over  current  contracts  on  which  the 
past  services  of  employees  have  obviously  no  bearing.  Pay- 
ments for  full  time  to  officers  or  employees  who  are  on  weekly 
or  monthly  salaries,  and  who  leave  in  the  middle  of  the  week 
or  month,  would  be  allowed  as  cost  where  it  is  impracticable  to 
retain  their  services  for  the  full  period.  Salary  on  a  weekly 
or  monthly  basis,  if  by  contract,  must  legally  be  paid  if  the 
employee  is  discharged  or  leaves  in  the  intervening  period. 

Where  the  resignation  of  an  officer  or  an  employee  who  is 
working  on  a  weekly  or  monthly  salary  is  demanded,  his  full 
time  should  not  be  charged  as  cost  on  current  contracts  unless 
it  can  be  shown  that  it  was  in  the  interest  of  these  contracts 
to  discontinue  such  services. 

Bonus  and  Pension  Payments 

Bonus  Payments 

Any  bonus  which  is  based  on  profits  payable  to  either 
workmen,  or  officers  and  clerks,  should  not  be  regarded  as  a 
regular  item  of  cost 


520  COST-PLUS   CONTRACTS 

Bonuses  paid  at  the  end  of  the  year  are  seldom  regarded 
as  a  salary  addition  but  more  as  a  reward  or  gift  for  the  faith- 
ful performance  of  duty.  They  depend  upon  the  amount  of 
profits  made  by  the  business  and  contributed  thereto  by  its  em- 
ployees. The  practice  of  some  firms  is  to  set  up  a  reserve  for 
salaries,  charging  off  each  month  a  specific  sum  to  overhead. 
In  such  a  case,  if  the  bonus  is  properly  authorized  by  the  firm 
and  is  an  actual  liability,  it  may  be  treated  as  a  cost  item  when 
paid,  but  where  it  is  contingent  in  any  way  either  on  profits  or 
length  of  service,  it  should  not  be  so  treated.  All  bonuses  of 
this  character  should  be  charged  to  profits,  and  only  those  ac- 
tually paid  for  current  work  should  be  treated  as  a  regular 
cost  item. 

A  bonus  calculated  as  a  percentage  on  weekly  wages  is 
sometimes  offered  to  those  employees  who  hold  their  jobs  con- 
tinuously for  six  months  or  longer.  If  such  a  bonus  is  paid 
for  cost-plus  contracts,  it  should  be  reimbursed  without  profit. 
An  item  of  this  character  is  contingent  on  continuous  service 
and  in  the  opinion  of  the  author  should  be  classed  as  a  special 
organization  expense  on  which,  however,  the  contractor  should 
not  receive  any  profit.  Even  if  the  reserve  is  made  each  week 
and  charged  to  wages  with  an  offsetting  credit  to  a  reserve 
account,  a  contract  should  not  be  charged  with  this  item  either 
directly  or  indirectly  until  the  money  has  actually  been  paid. 
If  the  bonus  is  added  to  direct  labor  it  becomes  a  direct  charge ; 
if  added  to  indirect  labor  it  becomes  part  of  the  overhead. 
Needless  to  say,  on  commercial  contracts  any  extra  percentages 
paid  to  workmen  should  be  charged  to  those  contracts. 

Pension  or  Compensation  Indemnities 

Pensions  are  only  chargeable  in  whole  or  in  part  to  cost- 
plus  work  when  a  reserve  is  set  up  for  this  expense,  based  on 
the  number  of  men  working  in  the  plant,  all  or  part  of  whom 
are  engaged  on  the  contracts. 


EXPENSE  AND  OVERHEAD  ITEMS        521 

Pensions  that  are  being  paid  to  workmen,  or  their  heirs, 
for  services  rendered  prior  to  the  commencement  of  cost-plus 
contracts  should  not  be  charged  thereto.  Usually  pensions 
are  based  on  the  number  of  years  of  service — in  most  instances 
twenty  years.  When  the  pension  commences,  in  the  majority 
of  cases,  the  employee  ceases  to  work  and  is  retired.  It  would, 
for  obvious  reasons,  be  unfair  to  charge  any  part  of  such  ex- 
penditures to  cost-plus  contracts,  their  proper  disposition  be- 
ing to  Surplus  account. 

Of  course,  where  reserves  are  set  up,  the  payments  of  the 
pensions  are  charged  thereto  and  do  not  affect  the  overhead  ex- 
penses. When  they  are  charged  to  overhead  as  a  reserve, 
they  form  part  of  the  general  administrative  expenses  and  are 
so  distributed. 

Insurance  and  Taxes 

Fire  Insurance 

The  United  States  Government  does  not  usually  require 
its  own  property  to  be  insured,  such  property  including  raw 
material  bought  on  the  government's  account,  finished  parts 
or  articles  owned,  or  any  asset  of  the  government.  Therefore, 
when  possible,  fire  insurance  policies  should  not  cover  govern- 
ment-owned property  and  the  government  should  not  partici- 
pate in  the  insurance  premium  ':harge  on  any  cost-plus  work. 
However,  blanket  policies  may  at  times  be  taken  out  to 
cover  the  plant  as  a  whole,  in  which  case  it  might  be  difficult 
to  apply  the  premium  to  any  particular  class  of  work  passing 
through  the  plant.  In  such  cases  the  insurance  would  be 
allowable  as  an  overhead  item.  Should  there  be  a  fire  loss 
under  such  a  policy,  the  compensation  received  from  the  in- 
surance companies  should  be  prorated  to  the  credit  of  cost- 
plus  contracts,  depending  upon  the  nature  of  the  loss.  Where 
the  premiums  are  charged  to  overhead,  they  should  be  pro- 
rated on  the  basis  of  the  proportion  of  work  in  process  and 


522  COST-PLUS   CONTRACTS 

stock  or  stores  on  hand.  The  contractor  should  be  reimbursed 
for  the  premiums  paid  with  profit,  and  the  proportion  of  the 
cost  chargeable  to  cost-plus  work  should  be  charged  as  normal 
cost. 

Insurance  Other  Than  Fire 

There  are  many  different  classes  of  insurance,  the  pre- 
miums of  which  should  be  regarded  as  cost  items — for  instance, 
insurance  covering  tornados,  losses  due  to  explosions,  losses  on 
buildings  and  contracts,  insurance  covering  use  and  occupancy, 
boilers,  robbery,  elevators,  and  so  on.  As  the  premiums  are 
paid  for  the  protection  not  only  of  capital  but  of  production, 
they  should  be  treated  as  part  of  the  cost  and  distributed  over 
all  contracts. 

Liability  Insurance 

Where  a  liability  insurance  company  assumes  all  the  risk, 
insurance  premiums  may  be  charged  as  cost  items  and  the 
contractee  or  buyer  should  bear  his  proper  proportion  thereof. 
Where  the  contractor  assumes  the  liability  in  case  of  an  acci- 
dent, the  losses  may  be  treated  in  various  ways.  The  com- 
missioners in  some  states  fix  the  liability  and  direct  in  what 
manner  the  indemnity  shall  be  paid  to  the  employee  who  has 
met  with  an  accident. 

Payment  may  be  made  in  one  of  two  ways  necessitating 
different  methods  of  treatment.  If,  for  example,  the  indem- 
nity is  paid  in  one  sum  it  is  either  chargeable  to  the  overhead 
expense  of  the  plant,  provided  the  accident  happened  when 
cost-plus  work  was  being  performed,  or  it  may  be  charged 
directly  to  a  specific  contract,  provided  the  injured  workman 
was  specifically  engaged  on  that  contract  and  not  on  others. 
In  the  case  of  indirect,  or  non-productive  workers,  the  loss 
should  be  charged  to  overhead. 

On  the  other  hand,  the  indemnity  may  not  be  paid  in  one 


EXPENSE  AND  OVERHEAD  ITEMS        523 

sum,  but  may  be  spread  over  a  long  period — from  twelve  to 
thirty-six  months — in  the  form  of  monthly  payments.  In 
cases  where  such  current  items  are  being  paid  to  indemnify 
accidents  which  happened  prior  to  work  beginning  on  cost- 
plus  contracts,  such  contracts  could  not  be  equitably  charged 
with  any  part  of  these  prior  indemnities.  However,  in  the 
majority  of  cases  it  may  be  more  practical  to  allow  all  liability 
premiums  to  be  charged  as  overhead  expense  disregarding 
when  the  accident  in  question  happened.  Any  liability  pay- 
ments made  after  the  completion  of  the  cost-plus  contracts 
would,  of  course,  be  borne  entirely  by  the  other  contracts,  as- 
suming that  the  cost-plus  contracts  had  participated  in  pay- 
ments for  accidents  which  happened  before  the  work  was 
started. 

In  some  government  contracts,  a  clause  is  introduced  re- 
imbursing the  contractor  in  the  performance  of  the  contract 
for  "a  proper  proportion  of  physical  losses  actually  sustained 
in  connection  with  the  business,  including  losses  by  flood, 
storm,  vandalism,  theft,  any  acts  of  God,  acts  of  war,  or  other 
casualties  not  compensated  for  by  insurance  or  otherwise." 
Naturally,  any  loss  of  an  exceptional  character  in  connection 
with  government  contracts,  would  have  to  be  specially  treated. 
Ordinary  losses  which  are  of  common  occurrence  in  manufac- 
turing plants  are  to  be  treated  as  previously  described. 

Premiums  for  Life  Insurance 

Life  insurance  premiums  are  sometimes  paid  as  a  pro- 
tection for  capital  investment  and  to  reimburse  the  firm  or 
company  for  the  loss  of  the  services  of  some  individual.  Upon 
the  death  of  the  assured  the  insurance  is,  of  course,  paid  to  the 
company  and  not  to  the  heirs  of  the  assured.  Such  premiums 
can  in  no  sense  be  regarded  as  a  charge  against  any  contract. 
The  amount  recovered  from  the  insurance  company  could  not 
be  credited  to  contracts,  many  of  which  would  have  been  com- 


524  COST-PLUS   CONTRACTS 

pleted  long  before  the  insurance  was  paid     Such  insurance 
premiums  are  clearly  a  charge  to  profit  and  loss  or  surplus. 

Income  and  War  Excess  Profits  Taxes 

All  income  taxes  and  war  excess  profits  taxes  are  charge- 
able against  surplus  and  should  not  be  treated  as  a  cost. 

Government  Taxes  on  Freight 

Taxes  which  apply  to  freight  on  material  and  supplies 
ordered  for  a  cost-plus  government  contract  should  not  be 
charged  as  a  cost.  An  account  should  be  set  up  on  the  books 
and  charged  with  all  items  of  this  character.  At  the  end  of 
each  month  a  voucher  should  be  prepared  and  when  approved 
by  the  government  accountant  in  charge,  should  be  sent  to 
the  Internal  Revenue  Department  in  Washington  in  order  to 
have  the  amount  refunded. 

Taxes  on  freight,  supplies,  and  other  indirect  materials 
which  do  not  definitely  apply  to  any  particular  contract  when 
purchased  should  be  charged  as  overhead.  Any  portion  there- 
of chargeable  to  the  government  in  connection  with  cost-plus 
contracts  should  be  charged  in  the  same  proportion  as  the  over- 
head charges  are  distributed.  The  balance  of  the  account, 
after  setting  up  the  charge  to  the  government,  is  a  direct 
charge  to  the  contractor. 

Interest,  Depreciation,  and  Depletion 

Interest  as  a  Cost 

While  interest  is  not  generally  recognized  as  a  standard 
item  of  cost  because  of  the  great  difference  of  opinion  among 
accountants  as  to  the  correctness  of  its  inclusion,  yet  on  some 
cost-plus  contracts  interest  is  allowed.  The  matter  should,  in 
all  cases,  be  treated  according  to  either  the  terms  of  the  con- 
tract or  any  other  specific  agreement  between  the  buyer  and 
seller. 


EXPENSE  AND  OVERHEAD  ITEMS        525 

Interest  charges  may  be  divided  into  the  three  following 
divisions : 

1.  Interest  on  borrowed  money  actually  paid. 

2.  Interest  on  plant,  machinery,  and  equipment. 

3.  Interest  on  working  capital. 

Interest  on  Borrowed  Money 

Any  interest  paid  by  the  contractor  on  borrowed  money 
used  as  working  capital  may  be  treated  as  a  part  of  the  regular 
overhead  expense  only  when  the  actual  amount  of  capital  bor- 
rowed and  used  in  connection  with  a  definite  contract  can  be 
determined.  Ordinarily,  however,  it  would  be  difficult  to 
allocate  the  exact  capital  required  to  finance  any  particular 
contract.  Therefore,  the  charging  of  the  whole  amount  to 
overhead  to  be  prorated  over  all  contracts  is  advocated,  ex- 
cepting where  the  interest  is  allowable  only  on  the  material 
used  on  cost-plus  work,  such  as  in  some  government  contracts 
which  include  the  "Definition  of  Costs"  (see  page  496)  as  a 
part  of  the  contract. 

The  following  quotation  is  taken  from  the  pamphlet 
"Definition  of  Costs :"  "Interest  on  investment  or  on  bonded 
debt  shall  not  be  considered  as  an  expense  entering  into  the 
cost  of  contracts  for  the  United  States,  but  the  contracting 
officer  will  reimburse  the  contractor  for  interest  paid  on  money 
borrowed  to  finance  the  purchase  of  materials  necessary  to 
complete  contracts  for  the  United  States.  Interest  cost  will 
not  be  considered  as  a  cost  to  the  contractor  upon  which  profit 
is  to  be  calculated." 

In  the  pamphlet  already  referred  to,  the  following  method 
is  suggested  for  ascertaining  the  interest  charge  on  money 
borrowed  to  finance  purchases  of  material : 

"i.  Ascertain  the  amount  of  the  loan  upon  which  interest 
is  actually  being  paid.  This  loan  should  have  been  negotiated 
at  or  after  the  date  of  the  government  contract.     When  the 


526  COST-PLUS   CONTRACTS 

amount  of  the  loan  is  ascertained,  the  amount  of  interest  pay- 
able on  such  loan  each  month  should  also  be  ascertained. 

"2.  Take  the  total  amount  of  charges  each  month  against 
all  contracts,  including  material,  labor,  and  overhead,  and 
divide  the  amount  of  material  charged  during  the  current 
month  to  the  government  contracts  by  this  amount,  thereby 
ascertaining  the  percentage  to  use  in  connection  with  charging 
the  cost-plus  contracts  with  interest.  For  example,  if  the 
amount  of  the  loan  is  $100,000  at  6%,  the  monthly  charge  for 
interest  would  be  $500;  and  if  the  total  charges  against  all 
contracts  for  the  month  amounted  to  $400,000,  and  the  amount 
charged  against  the  government  contract  for  material 
amounted  to  $150,000,  the  material  charge  would  therefore  be 
37-5%  of  the  total  charges,  and  the  amount  of  interest,  there- 
fore, which  would  be  chargeable  against  the  cost-plus  contract 
would  be  37.5%  of  $500." 

The  word  "material"  here  may  be  construed  as  direct  or 
indirect  material. 

Interest  on  Working  Capital 

The  following  method  is  suggested  for  ascertaining  inter- 
est on  the  working  capital. 

"The  total  charges  for  the  month  against  cost-plus  con- 
tracts are  to  be  ascertained  and  6%  of  this  amount  is  to  be 
charged  as  interest  to  the  cost-plus  contracts  from  the  fifteenth 
day  of  each  month — this  being  considered  as  an  average  for 
the  month.  Such  interest  is  to  run  until  the  charges  in  ques- 
tion have  been  paid. 

Inventories 

"Interest  on  the  inventories  of  raw  material  and  supplies 
on  hand  is  to  be  found  as  follows :  "The  total  charges  against 
all  contracts  are  to  be  ascertained,  and  the  percentage  of  the 
charges  against  cost-plus  contracts  to  the  total  of  all  charges 


EXPENSE  AND  OVERHEAD  ITEMS        527 

is  to  be  used  as  percentage  to  apply  to  the  inventories  as  re- 
ferred to,  and  interest  at  6%  on  said  amount  is  to  be  allowed 
the  contractor  each  month.  The  inventories  in  question  are 
to  be  taken  at  a  figure  which  would  be  the  average  inventories 
arrived  at  by  taking  the  beginning  inventories  and  the  ending 
inventories  each  month  and  dividing  the  same  by  two.  The 
interest  on  the  inventories  is  to  date  from  the  first  day  of  each 
month. 

"The  buyer  is  to  be  allowed  interest  on  all  payments  made 
to  the  contractor. 

"All  interest,  as  referred  to  above,  should  be  carried  in 
the  same  manner  as  regular  interest  account  of  an  account 
current.  In  other  words,  this  interest  account  at  the  end  of 
each  month  will  show  the  amount  to  be  paid  to  the  contrac- 
tor by  the  buyer. 

"It  is  understood  that  if  the  buyer  makes  the  contractor 
any  loans,  interest  on  such  loans  or  any  interest  that  the  con- 
tractor pays  to  banks  or  other  parties  is  not  to  be  charged  as 
cost  on  cost-plus  contracts.  Interest  on  working  capital,  as 
outlined  above,  is  intended  to  cover  these  or  other  items  of  in- 
terest." 

Interest  on  Plant,  Machinery,  and  Equipment 

When  the  product  passes  through  practically  all  depart- 
ments of  the  plant  and  also  in  cases  where  interest  on  the  capi- 
tal invested  in  buildings,  machinery,  and  equipment  cannot  be 
charged  directly  to  specific  contracts,  it  should  be  treated  as 
part  of  the  general  overhead  expense  to  be  distributed  over  all 
contracts.  Neither  interest  nor  depreciation  on  any  building, 
machinery,  or  equipment  not  used  in  connection  with  cost-plus 
work  should  be  charged  against  a  cost-plus  contract. 

As  the  interest  charge  is  based  on  the  amount  of  capital 
invested,  only  the  depreciated  values  of  the  plant  assets  should 
be  considered.     In  other  words,  if  the  original  cost  of  the 


528  COST-PLUS  CONTRACTS 

building  was  $100,000  and  its  value  has  depreciated  $10,000, 
either  by  writing  off  or  providing  a  reserve,  the  net  capital 
invested  in  that  building  would  be  $90,000  and  interest  should 
be  calculated  on  this  amount  only. 

Profit  on  interest  chargeable  on  a  plant  investment  which 
is  owned  by  the  contractor  should  never  be  allowed.  The  in- 
terest in  such  a  case  does  not  represent  either  a  payment  or  an 
expenditure  in  connection  with  a  particular  contract.  In  other 
words,  any  interest  allowed  on  plant  assets  should  be  a  reim- 
bursement only,  without  the  addition  of  any  profit  such  as 
would  be  added,  for  instance,  to  depreciation  which  is  referred 
to  below. 

Depreciation  and  Interest  on  Plant  Assets 

On  cost-plus  work  it  sometimes  happens  that  part  of  the 
equipment  is  owned  by  the  contractor  and  part  by  the  buyer. 
In  such  a  case  the  same  rates  of  depreciation  should  be  calcu- 
lated on  the  cost  of  both  the  contractor's  and  the  buyer's  equip- 
ment, and  in  the  case  of  interest  the  calculations  should  be 
made  on  the  depreciated  value  in  both  cases.  In  other  words, 
the  buyer  should  be  credited  with  both  depreciation  and  inter- 
est on  the  same  terms  or  in  the  same  manner  that  he  is  charged 
with  these  items  by  the  contractor  for  the  use  of  the  latter's 
equipment. 

An  interesting  method  of  adjusting  this  matter,  usually 
to  the  satisfaction  of  all  concerned,  is  as  follows :  The  total 
valuation  of  the  buyer's  and  the  contractor's  plant  assets  and 
the  percentage  of  one  to  the  other  is  ascertained  and  used  as 
the  basis  for  the  distribution  of  depreciation  and  interest.  To 
illustrate,  if  the  total  valuation  of  the  plant  assets  in  a  given 
shop  amounts  to  $100,000  and  40%  belongs  to  the  buyer  and 
60%  to  the  contractor,  these  percentages  would  be  used  in 
connection  with  the  percentage  of  direct  labor  employed,  for 
determining  the  distribution  of  depreciation.     No  depreciation 


EXPENSE  AND  OVERHEAD  ITEMS 


529 


and  interest  would  be  chargeable  against  the  buyer  until  his 
percentage  of  direct  labor  exceeded  40%.  If  for  instance  the 
buyer's  percentage  for  direct  labor  was  50%,  then  he  would 
bear  ten-sixtieths  of  the  amount  charged  as  depreciation  on 
machinery  and  interest  on  plant. 

While  the  policy  of  having  the  valuation  of  a  plant  made 
by  an  appraisal  company  meets  with  the  hearty  indorsement 
of  the  author,  often  from  a  cost  standpoint  appraisal  figures 
may  be  misused  if  values  other  than  cost  are  set  up  on  the 
books.  Some  appraisals  show  the  market  or  reproductive 
value  in  addition  to  the  cost  value  less  the  proper  rate  for 
depreciation.  To  set  up  either  a  reproductive  or  depreciated 
value  in  the  accounts  is  to  place  figures  on  the  books  which 
are  useless  in  calculating  depreciation  and  interest.  While 
the  market  value  of  the  plant  is  useful  information  if  a  sale  is 
being  considered,  and  the  reproductive  value  is  equally  neces- 
sary in  case  of  fire  loss,  neither  of  these  values  has  any 
bearing  on  depreciation  value.  On  the  other  hand,  the  setting 
up  of  the  depreciated  value  on  the  books  eliminates  the  cost 
value  of  the  property  upon  which  depreciation  should  be  based. 
Therefore,  only  the  cost  value  of  an  asset  should  be  entered  on 
the  books  wherever  the  appraisal  report  is  used. 

Depletion 

In  checking  up  costs  on  cost-plus  contracts,  consideration 
should  be  given  to  the  factor  of  depletion.  As  already  stated, 
the  contract  itself  specifies  that  material  and  other  items  are 
chargeable  at  their  cost  to  the  contractor.  Raw  materials, 
however,  such  as  lumber,  iron  ore,  or  coal  may  be  extracted 
from  land  owned  by  the  contractor  and  used  on  his  contract 
work.  Under  ordinary  conditions  this  kind  of  material  would 
be  charged  at  the  cost  of  mining  or  lumbering  plus  a  percent- 
age of  the  cost  of  the  land  itself — computed  so  as  to  extinguish 
the  purchase  price  when  the  material  in  or  on  the  land  was 


530 


COST-PLUS   CONTRACTS 


removed.     So  long  as  the  property  remains  in  the  possession 
of  the  contractor,  his  cost  only  must  be  considered. 

The  argument  has  been  raised  that,  if  the  market  price 
of  the  material  contained  in  or  on  the  land  advances  consider- 
ably, this  naturally  raises  the  value  of  the  land  to  a  much 
higher  figure  than  was  originally  paid  for  it.  Therefore  the 
contractor  should  recalculate  his  costs  of  material  over  and 
above  th«  actual  amount  paid  for  mining  or  lumbering,  and 
base  them  on  the  appraised  market  value  of  the  land.  While 
this  theory  would  be  sound  for  the  purpose  of  sale,  it  would 
not  apply  to  cost-plus  work.  As  stated  before,  the  terms 
of  a  cost-plus  contract  always  presuppose  that  the  contractor 
is  to  charge  all  elements  of  cost  at  their  actual  cost  plus  a  fair 
percentage  of  profit. 

Method  of  Figuring  Depreciation 

The  figuring  of  depreciation  is  a  simple  matter  when  the 
rates  have  once  been  decided  upon,  after  which  the  distribu- 
tion of  the  charges  may  be  based  on  the  productive  labor 
method  or  any  other  suitable  plan  of  overhead  distribution. 
Of  course,  the  most  accurate  results  are  obtained  by  making 
depreciation  charges  departmentally  as  the  contract  work 
passes  through  departments. 

As  depreciation  can  only  represent  a  loss  in  actual  capital 
investment,  the  charge  in  all  cases  must  be  calculated  on  the 
cost  value  of  the  assets.  The  contention  has  been  raised  that 
the  market  value  of  plant  assets  should  be  set  up  on  the  books 
and  depreciation  calculated  thereon.  This  theory  is  entirely 
wrong.  If  the  plant  assets  at  cost  as  carried  on  the  books  are 
above  the  market  value  and  the  contractor  wishes  to  reduce 
them  to  this  value,  he  can  do  so  only  by  writing  off  depreciation 
from  the  cost  thereof.  On  the  other  hand,  if  the  market  value 
is  in  excess  of  cost  and  the  plant  assets  are  written  up  to  agree 
with  such  market  value,  this  would  entail  crediting  profit  and 


EXPENSE  AND  OVERHEAD  ITEMS        531 

loss  or  surplus  with  a  fictitious  profit  and  then  writing  off 
this  fictitious  profit  at  future  dates  in  the  form  of  depreciation. 
This  procedure  would  be  entirely  unsound.  It  is  well  to  em- 
phasize again  that  depreciation  can  only  apply  to  the  amounts 
actually  invested  in  plant  assets  and  has  nothing  to  do  with 
their  market  value.  If  the  contractor  desires  to  sell  his  plant 
he  may  increase  its  valuation  to  the  market  value  if  such  value 
is  higher  than  cost,  but  this  has  nothing  whatever  to  do  with 
the  question  of  depreciation. 

Profit  may  be  added  to  the  depreciation  charge  for  work 
on  cost-plus  contracts  on  the  theory  that  as  depreciation  repre- 
sents a  loss  in  the  value  of  the  equipment  used,  it  is  as  much  a 
part  of  the  cost  as  perishable  tools  which  are  entirely  used  up, 
or  the  depreciation  on  asset  tools. 

Guarding  of  Property 

Police  Protection 

There  are  three  kinds  of  police  protection,  namely,  protec- 
tion by  military  forces,  by  armed  guards  employed  for  the 
purpose,  and  by  detectives.  It  is  good  business  policy  for 
armed  guards  to  be  employed  for  the  prevention  of  damage 
to  the  plant  whether  or  not  governmental  work  is  being  done. 

Where  cost-plus  work  is  handled,  the  contracts  would 
naturally  bear  their  proper  proportion  of  this  expense  which 
should  be  charged  to  overhead.  But  where  special  guards  are 
employed  to  guard  government  property,  the  expense  would 
be  chargeable  in  full  to  the  government  and  should  form  part 
of  the  normal  cost.  If  the  contractor,  when  undertaking 
government  work,  increases  the  number  of  guards,  the  govern- 
ment should  not  bear  all  the  cost,  inasmuch  as  both  property 
and  profits  of  the  contractor  are  thereby  protected.  Such  pro- 
tection is  analogous  to  insuring  the  occupancy  of  business 
premises  which  naturally  insures  the  capacity  to  make  profits. 


532 


COST-PLUS  CONTRACTS 


Where  the  plant  is  considered  by  the  contractor  to  be 
sufficiently  protected,  prior  to  government  work,  and  where 
the  contractor  is  instructed  to  employ  extra  guards,  all  extra 
expense  in  connection  therewith  should  be  chargeable  against 
the  contracts  provided  that  the  cost-plus  contracts  are  the  only 
contracts  being  worked  on.  In  other  words,  the  excess  cost 
which  a  contractor  is  obliged  to  incur  on  account  of  these 
contracts  should  be  charged  in  full  against  such  contract.  In 
cases  where  the  adequate  protection  of  the  contractor's  prop- 
erty as  a  business  proposition  prior  to  government  work  has 
been  neglected  or  not  provided  for,  the  contractor  should  bear 
a  portion  of  this  cost, 

Guard  House 

Guard  houses  are  small  buildings  erected  for  the  use  of 
the  men  who  guard  the  plant — whether  special  police  or  watch- 
men. In  the  majority  of  cases  these  guard  houses  would  be 
treated  as  a  betterment  or  an  asset  addition  to  the  plant,  the 
whole  expense  of  which  would  be  borne  by  the  contractor  on 
the  theory  that  he  should  properly  safeguard  his  plant  from 
theft,  the  loitering  of  undesirable  persons,  or  malicious  de- 
struction. But  where  the  protection  is  adequate  for  normal 
conditions  and  the  contractor  is  requested  to  provide  additional 
safeguards,  such  additional  expense  may  be  treated  either  as 
1 00%  overhead  to  the  cost-plus  contracts  or  as  overhead  for 
distribution.  It  would  seem  more  equitable,  however,  to  treat 
the  whole  expense  as  overhead,  inasmuch  as  the  plant  is  there- 
by receiving  the  benefit  of  extra  security  while  engaged  on 
profitable  contracts, 

Guards'  Uniforms,  Badges,  and  Other  Equipment 

The  cost  of  the  equipment  of  police  guards  who  may  be 
hired  for  the  protection  of  special  contracts  should  be  limited 
to  the  amortization  of  any  guard  houses,  the  cost  of  wages, 


•   EXPENSE  AND  OVERHEAD  ITEMS        533 

and  the  cost  of  serviceable  uniforms  and  badges  which  may 
answer  the  purpose  intended.  Overcoats,  shoes,  or  puttees 
should  not  form  a  part  of  this  cost,  nor  should  the  badges 
be  expensive.  The  cost  of  all  identification  cards  of  em- 
ployees should  be  charged  to  overhead  expense  inasmuch  as 
the  contractor  participates  equally  with  the  buyer  in  such 
benefit. 

Distribution  of  Protection  Charges 

Where  the  cost  of  police  protection  cannot  be  distributed 
by  means  of  any  of  the  standard  methods,  it  may  be  allocated 
to  the  various  contracts  on  the  basis  of  the  number  of  pro- 
ductive employees  engaged  on  each. 

Miscellaneous  Expense  Items 

Blue-Prints 

Blue-prints  supplied  by  the  contractor  may  be  subject  to 
costs  and  profit.  If  supplied  by  the  buyer,  no  profit  should  be 
added  thereto.  All  blue-prints  charged  to  the  cost-plus  work 
should  be  accounted  for  at  the  end  of  the  contract,  as  these 
documents  may  be  of  value  to  the  buyer  on  other  contracts. 

Cash  Discount 

Any  discount  obtained  by  the  contractor  on  direct  mate- 
rial bought  for  and  chargeable  to  cost-plus  contracts,  should 
be  deducted  from  the  purchase  price.  Indirect  material  and 
supplies  are  usually  carried  in  stock,  and  information  as  to  the 
amount  used  on  cost-plus  contracts  may  not  be  obtained  until 
the  end  of  the  cost  period.  The  following  plan  is  suggested 
to  take  care  of  cash  discount :  Add  the  totals  of  indirect  ma- 
terial and  supplies  which  are  chargeable  to  both  cost-plus  and 
other  contracts;  ascertain  the  percentages  they  bear  to  each 
other;  use  these  percentages  for  the  distribution  of  the  cash 
discount  in  each  case. 


534  COST-PLUS  CONTRACTS 

Drafting  Expenses 

Drafting  expenses  are  ordinarily  a  direct  charge  against 
the  job  for  which  the  drawings  are  made.  In  no  case  should 
a  certain  amount  of  this  expense  be  charged  to  a  cost-plus 
contract  and  the  balance  to  overhead  in  which  the  contract 
also  participates.  Another  method  of  handling  the  item  as  a 
direct  charge  is  to  treat  it  in  the  same  manner  as  stated  under 
the  heading  "Rebuilding,  etc.,"  page  499. 

• 

Defective  Work 

Spoiled  and  defective  work,  if  not  more  than  the  average 
amount  under  normal  conditions,  is  allowed  as  an  element  of 
cost  chargeable  to  cost-plus  contracts;  but  if  such  work  is  the 
result  of  carelessness  which  could  have  been  avoided  by  the 
exercise  of  reasonable  diligence  on  the  part  of  the  contractor 
or  his  supervising  agents,  it  is  not  allowed  as  an  element 
either  of  direct  or  overhead  cost. 

Experimental  Expense 

When  expense  incurred  on  experimental  work  has  a  direct 
bearing  on  cost-plus  contracts,  it  may  be  charged  in  full;  and 
the  same  rule  would,  of  course,  apply  to  any  contract.  Work 
of  this  character  is  sometimes  steadily  maintained  as  a  part  of 
the  fixed  manufacturing  policy,  in  which  case,  if  it  is  of  value 
to  the  cost-plus  work,  it  may  bear  its  proper  share  of  the  over- 
head chargeable  thereto. 

Employment  Department 

The  maintenance  of  an  employment  department  should  be 
treated  as  an  overhead  expense  and  in  no  case  as  a  direct 
charge  against  cost-plus  contracts.  The  theory  may  be  ad- 
vanced that  the  contractor  is  compelled  to  open  such  a  depart- 
ment if  he  is  to  secure  good  workmen  and  exclude  undesirable 
employees.      Nevertheless,   as  such  a  department  obviously 


EXPENSE  AND  OVERHEAD  ITEMS         535 

tends  to  increase  the  efficiency  of  the  whole  plant,  and  the  more 
efficient  the  plant  the  greater  the  earnings,  all  contracts  should 
participate  in  the  expense  of  maintaining  the  department. 

Intercompany  Expenses 

A  subsidiary  company  is  sometimes  charged  with  certain 
expenses  incurred  by  the  parent  company.  Any  intercompany 
expenses  should  always  receive  particular  attention  to  deter- 
mine whether  or  not  they  are  equitable  as  applied  to  cost-plus 
work.  Usually  a  subsidiary  company  has  a  complete  organiza- 
tion of  its  own.  Therefore  any  charge  from  the  parent  com- 
pany should  consist  only  of  a  proper  share  of  executives'  sala- 
ries and  any  items  of  expenses  expressly  incurred  on  behalf  of 
the  subsidiary  company.  In  other  words,  the  subsidiary  com- 
pany should  not  be  charged  with  a  share  of  the  general  and 
administrative  expenses  of  the  parent  company  as  a  whole. 

Patents  and  Royalty 

No  expenditures  on  patents,  unless  explicitly  authorized 
by  the  buyer,  should  be  charged  to  cost-plus  contracts,  even  if 
such  items  are  carried  on  the  books  of  the  contractor. 

When  royalty  is  paid  currently  on  machinery  or  equip- 
ment in  daily  use,  it  may  properly  be  distributed  over  all  con- 
tracts, providing  that  the  machinery  upon  which  the  royalty 
is  paid  is  used  in  connection  with  all  contracts,  otherwise  it  is 
chargeable  only  to  those  which  use  that  particular  machinery. 
Where  royalty  is  paid  for  a  limited  period  of  time  at  the  ex- 
piration of  which  it  ceases,  it  should  be  treated  as  a  deferred 
charge  applicable  to  future  contracts, 

Rental — Specific  Charge  for  Same 

If  a  contractor  rents  a  storage  building  to  be  used  exclu- 
sively in  connection  with  cost-plus  contracts,  the  rental  would 
be  chargeable  in  full.     This  does  not,  however,  apply  to  space 


536  COST-PLUS    CONTRACTS 

in  the  factory  or  plant.  The  contractor  is  reimbursed  for  the 
use  of  his  plant  by  charging  off  depreciation,  taxes,  insurance, 
repairs,  etc.,  and  the  cost-plus  contract  bears  its  proper  propor- 
tion thereof. 

Scrap  and  Waste 

The  salvage  value  of  scrap,  waste,  or  containers  used  on 
cost-plus  contracts  should  be  deducted  from  the  material  or 
overhead  cost  of  the  work.  Care  should  be  taken  to  credit  all 
current  contracts  with  the  salvage  or  scrap  applicable  thereto. 

Selling  Expense 

Selling  and  a  part  of  the  administrative  expenses  should 
not  be  charged  to  government  contracts.  (See  "Administra- 
tive Expenses,"  pages  518,  519.) 

Testing  Expense 

Testing  expenses  should  in  the  majority  of  cases  be  a 
direct  charge  against  current  contracts  and  not  against  over- 
head. A  good  rule  to  apply  in  connection  with  items  of  this 
character  is  to  set  up  two  accounts,  Testing  Expense  Direct  and 
Testing  Expense  Overhead.  To  the  first  account  would  be 
debited  all  direct  charges  against  contracts,  and  to  the  second, 
all  testing  expenses  which  could  not  possibly  be  allocated  to  a 
particular  contract. 

Training  Employees  Expense 

When  employees  are  trained  for  the  benefit  of  the  busi- 
ness as  a  whole,  the  expense  may  be  regarded  as  a  regular 
overhead,  but  where  trained  for  specific  contract  work,  the  ex- 
pense should  be  charged  to  the  contract  in  full. 

Welfare  Work 

Expenditures  on  welfare  work  should  be  treated  as  a 
cost  for  distribution  over  all  contracts  and  would  include: 


EXPENSE  AND  OVERHEAD  ITEMS        537 

1.  Wages  paid  employees  while  absent  on  account  of 

illness. 

2.  Expenses  of  operation  and  maintenance  of  hospital; 

also  medicine  and  first  aid  supplies  to  the  injured. 

3.  Subscriptions  to  hospitals  or  other  organizations  to 

cover  definite  benefits  to  employees. 

4.  Net  expense  of  operating  restaurants. 

5.  Vacation  allowances  to  wage  earners. 

6.  Other  expenses  such  as  conducting  club  rooms,  read- 

ing rooms,  educational  classes,  etc. 

These  expenditures  are  allowable  as  cost  on  the  theory 
that  they  promote  cordial  relations  between  employer  and  em- 
ployee, and  in  that  way  tend  to  increase  production  without  a 
corresponding  increase  in  the  cost. 

Errors  and  Losses  Due  to  Changes 

Reclamation  of  Errors 

All  claims  for  errors  should  be  a  direct  charge  against  a 
particular  contract  unless  it  is  difficult  to  apply  them  specifi- 
cally, in  which  case  they  may  be  classed  as  overhead  and  dis- 
tributed over  all  contracts.  It  should  be  borne  in  mind  that 
there  are  three  classes  of  overhead  expenses;  first,  overhead 
expense  which  under  certain  conditions  may  be  charged  in  full ; 
second,  expenditures  which  must  be  divided  between  two  or 
more  contracts  in  specific  amounts ;  and  third,  overhead  which 
must  be  distributed  on  the  same  percentage  basis  over  all  con- 
tracts. 

Changes  in  Specifications 

Any  losses  through  changes  in  the  specifications  should 
not  be  charged  to  cost-plus  contracts  unless  the  buyer  has 
issued  an  order  requiring  such  change,  in  which  case  the  loss 
should  then  be  treated  as  a  direct  cost  item. 


538  COST-PLUS    CONTRACTS 

Items  Not  Chargeable  Unless  Strictly  Applicable 

Attorney  Fees 

No  attorney  fees  for  the  collection  of  bad  debts  or  any 
other  element  of  expense  which  does  not  apply  to  cost-plus 
contracts  should  be  chargeable  thereto.  Services  rendered  by 
attorneys  in  connection  with  purely  organization  matters,  or 
charges  of  a  general  character  when  not  excessive,  may  be 
treated  as  regular  administrative  expenses  of  which  the  cost- 
plus  contracts  would  bear  their  proportionate  share. 

Bad  Debts 

Bad  debts  should  not  be  regarded  as  cost  under  cost-plus 
contracts,  unless  such  losses  would  apply  to  such  contracts. 

Brokerage  Expenses 

Brokerage  incurred  in  connection  with  commercial  paper 
should  not  be  considered  as  a  cost  item,  unless  interest  charges 
are  allowed  under  the  terms  of  the  contract  and  brokerage  is 
considered  as  a  part  of  the  cost  of  interest. 

Donations  and  Entertainment 

Donations  to  charity  and  gratuitous  gifts  should  not  be 
treated  as  cost  items.  They  have  no  connection  with  the  ex- 
pense of  manufacturing  and  are  chargeable  against  the  profits 
of  a  business. 

Entertaining  expenses,  like  donations  and  gifts,  have 
nothing  whatever  to  do  with  the  manufacturing  expenses  of  a 
business.  The  only  theory  upon  which  the  expense  of  enter- 
tainment might  be  treated  as  cost  would  be  when  incurred  for 
the  benefit  of  the  workmen.  In  such  a  case  it  would  be  allow- 
able to  charge  it  to  welfare  expense,  as  any  work  which  pro- 
motes efficiency  may  be  considered  a  legitimate  part  of  the 
overhead. 


EXPENSE  AND  OVERHEAD  ITEMS        539 

Real  Estate  Investment,  Expenditures,  Etc. 

Expenditures  in  connection  with  investments  outside  of 
the  regular  manufacturing  expense  should  not  be  charged 
against  current  contracts.  A  special  account  should  be  opened 
for  income  and  expenditures  on  investments  so  as  to  keep 
these  items  separate. 

Reserves 

Among  the  very  few  reserves  which  might  equitably  be 
charged  as  cost  to  cost-plus  work  are  those  for  depreciation 
and  pensions,  or  items  of  a  similar  character.  Reserves  for 
extraordinary  repairs,  contingent  expenses,  and  like  items 
should  not  be  allowed  as  cost. 

Engagement  of  Expert  Services 

The  author  is  of  the  opinion  that  professional  services 
rendered  to  a  contractor  for  the  benefit  of  the  business  as  a 
whole,  should  be  chargeable  to  overhead  and  prorated  over  all 
contracts  as  part  of  the  administrative  expenses  of  the  busi- 
ness. But  if  an  accountant  were  engaged  specifically  to  look 
after  the  contractor's  interests  in  connection  with  cost-plus 
contracts,  such  expenses  should  be  borne  wholly  by  the  con- 
tractor. 


CHAPTER  XXXIII 

SUSPENSION  OR  CANCELLATION  OF  CONTRACTS 

General  Considerations 

The  cancellation  or  suspension  of  any  contract,  whether 
on  a  fixed  price  or  a  cost-plus  basis,  may  cause  a  contractor 
some  loss  unless  the  settlement  covers  compensation  for  obli- 
gations he  has  entered,  into  in  connection  with  the  contract 
work.  The  possibility  of  loss  is  recognized  by  the  United 
States  Government  in  its  contracts  for  munitions  and  supplies. 
Therefore,  in  most  cases  a  cancellation  clause  protects  the  con- 
tractor, while  the  government,  in  its  endeavor  to  be  perfectly 
fair  and  just,  has  been  more  than  liberal  in  its  provision  for 
possible  losses  due  to  the  suspension  of  contract  work. 

Naturally,  the  precise  terms  of  the  cancellation  differ  in 
almost  every  case.  In  general,  however,  the  clauses  provide 
that  the  contractor  shall  be  reimbursed  for  raw  material,  sup- 
plies, component  parts,  and  work  in  process  on  hand  at  the 
termination  of  work  on  the  contract,  and  that  he  shall  be  pro- 
tected from  loss  on  commitments  or  orders  for  material  in 
transit  or  not  yet  shipped  from  the  vendor.  A  provision  is 
made,  however,  that  the  contractor  shall  not  be  reimbursed 
for  a  greater  quantity  of  material  than  would  have  been  re- 
quired to  finish  the  contract. 

The  general  principle  is  also  recognized  of  reimbursing 
the  contractor  for  all  obligations  incurred  solely  for  the  per- 
formance of  the  contract,  from  which  he  cannot  be  released 
without  suffering  loss.  It  should  be  borne  in  mind,  however, 
that  no  claims  would  necessarily  be  recognized  unless  they 
were  covered  by  the  provisions  of  the  contract. 

Reimbursement  may  be  made  to  contractors  upon  the  can- 

540 


CANCELLATION  OF  CONTRACTS  541 

cellation  of  a  fixed  price  contract,  a  fixed  profit  contract,  and  a 
cost-plus  contract.  A  general  outline  of  the  claims  that  might 
arise  in  each  case  is  herewith  given,  but  their  recognition 
would  depend  upon  the  terms  of  a  particular  contract  and 
whether  or  not  these  terms  cover  or  allow  the  interpretation 
applied  to  the  claim  in  question.  The  various  items  which 
may  possibly  be  claimed  are  discussed  under  the  heading  of 
each  kind  of  contract.  Some  of  them  are  more  or  less  of  an 
intangible  nature  and,  as  such,  very  difficult  to  set  forth  as  a 
claim.  Claims  cannot  be  made  for  a  contingent  or  a  possible 
loss,  but  must  be  based  on  actual  and  proven  loss, 

Cancellation  of  Fixed  Price  Contracts 
Valuation  of  Inventory 

At  the  termination  of  contract  work,  an  inventory  should 
be  taken  at  cost  of  all  items  of  raw  material,  component  parts, 
goods  in  process,  and  supplies  purchased  or  manufactured  ex- 
pressly for  the  contract  in  question.  On  these  items  the  con- 
tractor may  be  entitled  to  an  allowance  for  profit  in  addition 
to  reimbursement.  The  profit  on  goods  in  process  and  parts 
manufactured  may  be  ascertained  by  estimating  the  contract 
profit  on  a  completed  article  and  using  the  percentage  of  profit 
to  cost  to  ascertain  the  profit  on  the  cost  of  work  in  process. 
The  cancellation  clause  in  some  contracts  allows  a  10%  profit 
on  the  value  of  goods  in  process,  in  which  case  no  further  cal- 
culation need  be  made. 

An  itemized  statement  should  be  prepared  of  the  com- 
mitments or  unfilled  orders  which  could  not  be  canceled  with- 
out loss  and  which  could  not  be  used  for  any  other  purpose 
than  the  contract  in  question. 

The  negotiation  or  settlement  will  be  based  on  the  in- 
ventories and  statements  referred  to.  In  the  majority  of 
cases,  much,  if  not  all,  the  material  both  on  hand  and  repre- 
sented by  unfilled  orders  could  be  used  to  gOod  advantage,  if 


542 


COST-PLUS   CONTRACTS 


not  by  the  contractor  himself,  then  by  some  other  concern  in 
the  same  or  another  trade.  It  might  be  advisable  in  some 
cases  for  the  contractor  to  dispose  of  the  material  to  the  best 
advantage  and  to  be  allowed  a  certain  per  cent  to  cover  any 
possible  losses  in  connection  therewith.  Each  case  would 
necessarily  have  to  be  judged  separately.  In  the  majority  of 
instances  there  should  not  be  much  difficulty  in  disposing  of 
raw  material  without  loss,  unless  its  market  price  has  fallen. 
The  raw  material  cost  can  be  readily  determined,  but  the 
costing  of  goods  in  process  will  be  a  much  more  difficult  mat- 
ter if  no  cost  system  is  in  operation.  Where  cost  data  are  not 
available,  it  would  be  well  to  use  the  estimating  or  engineering 
cost  of  an  article  as  a  basis  for  computing  the  material  and 
direct  labor  costs,  and  then  add  an  arbitrary  percentage  to 
cover  the  overhead.  When  this  is  done,  the  figures  should  be 
taken  from  the  books  in  such  a  manner  as  to  show  that  the 
cost  represents  a  fair  average. 

Settlement  of  Commitments 

The  loss  on  commitments  or  unfilled  orders  may  be  in- 
curred by  others  besides  the  prime  contractor,  and  in  such  cases 
time  is  required  to  make  the  final  adjustments. 

As  an  illustration,  assume  that  A,  as  a  prime  contractor, 
orders  material  or  components  from  B,  and  B  to  fulfill  his 
contract  with  A  orders  material  from  C,  and  C  orders  from 
another  so  that  the  commitments  of  A  involve  a  score  or  more 
different  concerns.  In  such  a  case  the  most  practical  solution 
to  the  tangle  would  seem  to  be  the  negotiation  of  a  settlement 
with  the  prime  contractor  based  upon  a  percentage  of  the  un- 
filled orders,  leaving  to  him  the  reimbursement  of  B  and  so  on 
down  the  line.  In  other  words,  the  contract  could  be  termi- 
nated by  a  settlement  with  A  to  cover  all  claims,  leaving  to  him 
and  the  other  parties  interested  the  settlement  of  their  own 
trouble 


CANCELLATION  OF  CONTRACTS  543 

Amortization 

Practically  two  claims  for  amortization  which  may  be 
allowed  on  fixed  price  contracts  are : 

1.  Machinery,  buildings,  and  equipment  purchased  dur- 

ing the  term  of  the  contract  when  the  market 
price  is  lower  at  the  termination  of  the  contract. 

2.  Machinery,  buildings,  and  equipment  purchased  dur- 

ing the  contract  and  which  should  be  amortized 
over  the  contract. 

In  the  first  instance  the  contractor  would  be  penalized  un- 
less an  allowance  were  made  for  the  loss  incurred.  Thus  if 
plant  assets  were  bought  for  $100,000  during  the  term  of  the 
contract,  and  at  its  termination  their  market  price  had  shrunk 
to  $50,000,  it  would  be  necessary  to  charge  off  $50,000  in 
order  to  render  a  correct  balance  sheet. 

In  the  second  instance  the  contractor  would  be  penalized 
if  any  items  of  machinery,  buildings,  or  equipment  which  were 
not  written  off  during  the  contract  period  were  of  such  a  spe- 
cial nature  or  so  much  in  excess  of  the  ordinary  needs  of  his 
business  that  they  could  not  possibly  be  used  by  him  after  the 
termination  of  the  contract. 

In  the  adjustment  of  either  of  these  two  claims  on  a 
straight  price  contract,  the  question  of  importance  is  whether 
or  not  the  matters  were  covered  in  fixing  the  price.  At  the 
time  that  the  price  was  negotiated,  all  known  factors  should 
have  been  considered  and  included  in  the  cost  upon  which 
profit  was  figured.  If  this  was  the  case,  a  claim  under  these 
circumstances  would  not  be  entertained.  But  if  the  purchase 
of  the  building  or  equipment  in  question  was  made  after  the 
date  of  the  contract,  and  if  the  additions  to  the  plant  were 
not  contemplated  before  the  price  was  set  and,  furthermore, 
were  necessary  to  the  completion  of  the  contract,  then  such  a 
claim  should  be  considered. 


544  COST-PLUS   CONTRACTS 

Where  the  plant  additions  were  acquired  prior  to  the  date 
of  the  contract,  or  were  contemplated  and  added  after  the 
date  and  for  that  reason  were  supposedly  included  in  the  fixed 
price,  the  question  would  still  remain  as  to  what  proportion  of 
their  cost,  if  any,  would  remain  for  amortization  after  cancel- 
lation of  the  contract.  If  the  cost  of  the  plant  addition  were 
to  be  spread  over  the  period  of  the  contract,  and  the  amortiza- 
tion were  to  be  borne  wholly  by  the  contractor,  an  allowance 
should  be  made  to  him  for  that  part  of  the  amortization  which 
he  would  have  written  off  to  himself  during  the  period  esti- 
mated as  required  for  the  completion  of  the  contract. 

Plant  Rearrangement 

While  it  is  to  be  presumed  that  the  plant  of  a  contractor 
is  equipped  with  all  necessary  facilities  or  that  these  will  be 
provided  for  the  carrying  out  of  straight  price  contract  work, 
nevertheless  it  is  impossible  to  foresee  all  possible  requirements 
which  may  arise.  After  work  on  the  contract  begins  it  may  be 
advisable  to  rearrange  the  plant,  if  by  so  doing  production  can 
be  speeded  up.  Under  a  fixed  price  contract,  expenditures  of 
this  character  would  be  treated  as  a  deferred  expense  and  pro- 
rated over  the  whole  contract.  Therefore,  when  such  an  ex- 
pense has  been  incurred  under  the  belief  that  the  whole  con- 
tract would  be  finished,  the  contractor  should  be  allowed  that 
portion  which  he  would  have  written  off  against  the  unexpired 
portion  of  the  contract, 

Experimental  Work 

A  great  many  contracts  entail  considerable  preliminary 
expense  for  experimental  purposes.  If  this  expense  is  in- 
curred only  in  connection  with  the  contract,  the  same  prin- 
ciple applies  to  plant  rearrangement,  i.  e.,  the  contractor  should 
be  allowed  that  portion  of  the  expense  which  would  have  ac- 
crued to  the  unfinished  part  of  the  contract. 


CANCELLATION   OF  CONTRACTS  545 

Special  Tools 

On  practically  every  contract  tools  of  a  special  character 
are  used.  If  their  cost  is  applicable  to  the  whole  contract, 
the  item  should  be  classed  as  one  for  reimbursement — as  is  the 
case  with  plant  rearrangement  and  experimental  work,  dis- 
cussed above. 

Lease  of  Grounds  or  Building 

If  the  contractor,  to  facilitate  the  carrying  out  of  the 
contract  work,  has  leased  grounds  and  buildings  and  cannot 
dispose  of  the  lease  without  loss  at  the  cancellation  of  the  con- 
tract, he  should  be  reimbursed  for  only  that  period  of  the 
lease  which  would  cover  the  expected  time  required  to  com- 
plete the  contract.  The  contractor  could  not  claim  any  ex- 
pense for  a  lease  extending  beyond  the  period  which  the  con- 
tract would  naturally  have  run,  unless  an  extra  compensation 
were  especially  authorized  in  addition  to  the  selling  price  in 
the  contract. 

Occupancy 

When  contract  work  necessitates  an  increase  in  plant 
facilities,  compensation  in  the  form  of  rent  would  be  allowed 
for  government  buildings  on  the  contractor's  land  and  on  the 
floor  space  occupied  by  machinery  and  equipment  when  such 
facilities  are  owned  by  the  government.  The  compensation 
would  continue  until  the  government  removed  or  otherwise 
disposed  of  the  property  in  question. 

Contract  for  Service 

Various  contracts  for  service  may  have  been  specifically 
entered  into  in  connection  with  a  fixed  price  contract,  but  if 
such  service  were  limited  and  applicable  only  to  the  contract  in 
question,  then  the  contractor  could  claim  whatever  loss  he 
might  sustain  for  the  unexpired  portion  of  the  contract. 


546  COST-PLUS    CONTRACTS 

Organization  Expense 

In  a  plant  practically  restricted  to  government  work,  the 
unlooked-for  cancellation  of  contract  work  would  result  in  a 
loss  through  inability  to  resume  immediately  ordinary  com- 
mercial work.  A  claim  for  organization  expense  under  these 
circumstances  represents  something  tangible  and  it  would  seem 
that  some  portion  of  the  contractor's  administrative  expenses 
incurred  in  resuming  ordinary  commercial  work  should  be  re- 
imbursed. 

Profits 

A  possible  claim  for  profits  may  be  made  by  a  contractor 
although  the  contract  fails  to  recognize  a  claim  of  this  char- 
acter. The  question  here  arises:  If  a  contractor  is  recom- 
pensed for  actual  loss,  would  that  not  also  apply  in  some  de- 
gree to  losses  of  profit?  Had  the  contract  not  been  canceled, 
the  contractor  naturally  would  have  made  the  same  proportion 
and  probably  more  profit  on  the  uncompleted  part  of  the  work 
as  compared  with  that  completed.  Moreover,  his  profit  would 
be  diminished  in  the  interval  between  the  cancellation  of  the 
contract  and  the  resumption  of  normal  business.  Profit,  how- 
ever, could  not  be  claimed  for  both  of  these  losses,  as  naturally 
the  profit  which  is  allowable  on  the  one  would  include  the 
other. 

Saving  Clause  in  Contract 

Some  straight  price  contracts  may  contain  a  clause  which 
allows  the  contractor  a  percentage  of  the  savings  in  the  use  of 
raw  material  furnished  by  the  buyer,  such  saving  being  the 
difference  between  the  estimated  quantity  of  material  and  that 
actually  used.  In  a  case  of  this  kind  it  would  seem  that  a 
contractor  is  entitled  to  his  percentage  of  savings  on  the  com- 
plete contract,  based  on  the  average  savings  made  for  the  com- 
pleted portion  of  the  contract,  providing  that  the  saving  clause 


CANCELLATION  OF  CONTRACTS         547 

was  taken  into  consideration  in  fixing  the  contract  price  of 
the  completed  article. 

Cancellation  of  Fixed  Profit  Contracts 
Difference  Between  Fixed  Price  and  Fixed  Profit  Contracts 

The  distinction  between  a  fixed  price  contract  and  a  fixed 
profit  contract  is  as  follows:  The  fixed  price  contract  simply 
states  a  selling  price,  the  contractor  assumes  all  costs,  and  his 
profit  is  the  difference  between  his  cost  and  the  selling  price. 
In  a  fixed  profit  contract,  the  contractor  is  reimbursed  for  all 
his  costs  under  the  contract  and  receives  in  addition  a  fixed 
profit  for  each  article  delivered.  All  of  the  elements  as  out- 
lined in  connection  with  the  fixed  price  contract  would  also  be 
considered  in  connection  with  the  fixed  profit  contract,  except- 
ing that  in  this  latter  case  they  would  be  treated  from  a  dif- 
ferent standpoint. 

It  should  be  borne  in  mind  that  all  regular  expenditures 
incurred  during  the  completed  portion  of  the  contract,  and 
applicable  thereto,  should  already  have  been  taken  care  of. 
Therefore  these  items,  if  considered  at  all,  should  be  con- 
sidered only  in  connection  with  the  effect  produced  upon  them 
by  the  cancellation  of  the  contract. 

Inventory  Items.  As  under  a  fixed  price  contract,  com- 
pensation would  be  allowed  and  a  fair  proportion  of  profit  de- 
termined by  the  percentage  of  profit  applying  to  material  and 
goods  in  process,  taking  into  consideration  the  fixed  profit  on 
the  article  as  a  whole  or  according  to  the  terms  stated  m  the 
cancellation  clause  of  the  contract. 

Commitments.  The  treatment  of  this  item  would  be  the 
same  as  under  a  fixed  price  contract. 

Amortisation.  In  connection  with  this  item  the  con- 
tractor may  be  allowed  reimbursement  over  the  completed 
portion  of  the  contract. 

Plant  Rearrangement.     The  contractor  may  be  allowed 


548  COST-PLUS   CONTRACTS 

reimbursement  with  a  percentage  of  profit  on  the  completed 
portion  of  the  contract. 

Experimental  Work,  Special  Tools,  Leases,  Contract  for 
Service,  and  Organization  Expense.  In  these  cases  the  treat- 
ment would  be  the  same  as  under  a  fixed  price  contract  but  the 
reimbursement  would  be  for  a  fair  proportion  of  the  total 
amount  chargeable  to  the  completed  portion  of  the  contract. 
On  the  first  three  items  enumerated  a  proper  proportion  of  the 
profit  might  be  allowed  as  in  the  case  of  inventory  items. 

Profits.  These  would  be  treated  in  the  same  way  as 
under  a  fixed  price  contract. 

It  should  be  noted  that  the  reimbursement  of  the  above 
items  depends  solely  upon  their  applying  to  a  particular  con- 
tract. If  other  contracts  do  not  receive  any  benefit  therefrom 
either  before  or  after  their  cancellation,  then  the  contractor 
should  receive  reimbursement  for  the  total  expenditures  or 
total  loss  suffered.  If,  however,  the  expenditures  on  items 
of  this  character  benefit  other  contracts  either  before  or  after 
the  cancellation  of  the  contract,  then  the  contractor  would  be 
only  entitled  to  a  fair  percentage  of  his  expenditure  or  loss. 

Saving  Clause 

Under  some  contracts  the  cost  of  the  article  to  be  manu- 
factured is  estimated  and  is  called  normal  cost.  When  the 
contractor  succeeds  in  reducing  this  normal  cost,  he  partici- 
pates in  the  saving  thereof.  Generally  any  fluctuation  in  the 
material  prices  requires  that  the  normal  cost  be  correspond- 
ingly revised.  Some  adjustment  is  necessary  in  this  case 
where  a  contract  is  canceled. 

Cancellation  of  Cost-Plus  Contracts 
Distinction  Between  Fixed  Profit  and  Cost-Plus  Contracts 

The  difference  between  a  fixed  profit  and  a  cost-plus  con- 
tract is  that  expenditures  under  a  fixed  profit  contract  are  re- 


CANCELLATION   OF   CONTRACTS 


549 


imbursed  only  and  the  only  profit  allowable  is  on  the  article 
delivered;  whereas  in  a  cost-plus  contract  a  profit  is  added  to 
each  item  of  cost  directly  incurred  on  contract  work. 

Inventory  Items.  These  would  be  treated  in  the  same 
manner  as  in  the  other  contracts,  excepting  that  a  percentage 
of  profit  would  be  allowed  in  addition  to  reimbursement,  ac- 
cording to  the  terms  of  the  contract.  The  regular  expendi- 
tures on  the  completed  portion  of  the  contract  should  have 
already  been  taken  care  of.  Therefore,  the  effect  produced 
upon  the  value  of  the  inventory  by  the  cancellation  of  the 
contract  should  alone  be  considered. 

Commitments.  These  would  be  settled  by  reimbursement 
but  no  profit  should  be  added. 

Profits.  These  should  be  treated  in  the  same  way  as 
under  the  other  two  forms  of  contract. 

Amortization,  Plant  Arrangement,  Experimental  Work, 
Special  Tools,  and  Leases  on  Grounds  or  Buildings.  These 
items,  if  not  adjusted  before  the  cancellation  of  the  contract, 
would  be  treated  in  the  same  manner  as  in  a  fixed  profit  con- 
tract— that  is,  reimbursement  would  be  made  but  the  profit 
allowed  would  be  according  to  the  terms  of  the  contract. 

Contract  for  Service;  Organization  Expense.  These 
should  be  reimbursed  without  profit. 

Saving  Clause.  This  would  be  treated  in  the  same  man- 
ner as  in  the  fixed  profit  contract. 


The  views  expressed  in  connection  with  the  cancellation 
of  contracts  should  be  distinctly  understood  to  represent  only 
the  author's  personal  opinion  and  are  not  and  should  not  be 
considered  as  written  in  any  official  capacity  whatever. 


INDEX 


Account  classification, 

changes  in,  448 
Accounting   records, 

examination  of,  437-438 
Accounts, 

factory     ledger     controlling,     308, 

315-337 
general  ledger  controlling,  293-314, 
328 

operation   of   in   estimating  cost 
systems,    463,    466,    468,    473, 
474,  476 
Accounts  payable  voucher,  247-250 
Forms,  247,  248 
invoices  grouped,  249 
operation  of,  248,  249 
pay-roll  record  attached,  249 
voucher   check,  249 
Adjustments, 

discrepancies  in  cost,  335,  336 
factory       ledger       accounts       and 

records,  335-337 
inventory,  335,  336,  378,  480 
Administrative  expenses,  18,  19 
treatment     under     cost-plus     con- 
tracts, 518 
Advertising, 
literature,   aid   to  product  classifi- 
cation, 42,  418 
Allowances  to  customers,  21 
Amortization, 
and  depreciation,  154 
abnormal,  160,  161 
legal  definition,  154-156 
government  contracts,  542,  547,  549 
method  of,  data  necessary  for  de- 
termining,  161 
Analysis, 
of  inventory,  465,  466 


Form,  467 
of  sales  and  costs,  286-288 
Form,  287 
Analysis  record,  254-257 
Form,  256 
supplementary  to  voucher  register, 
254,  255 
Application  of  cost  principles,  10,  11 
Appraisal  of  plant  assets,  394 
Article, 
cost, 
checking,  227,  228 
estimated,  460 
Assembling  departments, 
cost-finding   method   applicable  to 

29 
Attorney  fees, 
treatment     under     cost-plus     con- 
tracts, 538 

B 

Bad  debts, 
treatment     under     cost-plus     con- 
tracts, 538 
Balance  sheet,  293 
comparative,  339 

Form,  341 
illustration  of,  302 
preparation  of,  301,  302,  306 
Betterments, 
treatment     under     cost-plus     con- 
tracts, 497 
Bill  of  material,  84-86 
Form,  85 
order  and  process  methods  of  cost- 
finding,  85,  86 
Bin  records,  77,  78 

proof  of,  445,  446 
Blue-prints, 
tracts,  533 


551 


552 


INDEX 


Bonus    (See  "Wage  systems,  bonus") 
Boot  and  shoe  plants, 
cost-finding      methods      applicable 
to,  28 
Brokerage  expenses, 
treatment     under     cost-plus     con- 
tracts, 538 
Buildings, 

depreciation  rates,  146,  147,  152 
mechanical  equipment,  147 
Businesses,  cost  classification  of,  400 


Cabinet  shops, 
cost-finding  method  applicable   to, 
26,  27 
Calculation  blank,  221-224 

Form,  223 
Canceled  check  attached  to  accounts 

.payable  voucher,  249 
Cancellation     of     government     con- 
tracts, 540-549,  (See  also  "Govern- 
ment contracts") 
Carlin,    Captain    J.    P.,    quoted    on 
maximum  percentage  for  overtime, 
158-160 
Cash, 

accounting  for,  295-298 
Cash  discounts, 
treatment     under     cost-plus     con- 
tracts, 533 
Cartage   inward    (See   "Freight   and 

cartage  inward") 
Catalogues, 
aid  to  product  classification,  42,  418 
filing  of,  71,  72 
Charges, 
direct,  13 

indirect,   16,   17    (See   also  "Over- 
head") 
to  jobs,  analysis  of,  264 
Charging   factory  expenditures,  243- 

265 
Charts, 
analysis  of  elements  of  cost,  23 
classification   of — 
cost  summary  records,  292,  313, 

314 
factory  departments,  41 


factory  orders,  56 
labor  reports,  121 
overhead,  183 
overhead  reports,  197 
production  reports,  208 

factory     ledger      controlling      ac- 
counts, 330,  332 

financial    and    factory    statements, 

374 
showing  application  of  methods  of 

cost-finding,  33 
showing  handling  of  material  and 
material  reports,  95 
Chemical  manufacturing  plants,  cost- 
finding  methods  applicable  to,  21 
Qassification  of, 
accounts,  changes  in,  448 
departments,  35-40 
changes  in,  448 
chart  showing,  41 
enterprises,  400-402 
inventory,  method  of,  444 
product,  40,  42,  43,  418,  448 

at  installation  of  cost  system,  418 
changes  in,  448 
Clerks,  factory, 

charging  salaries  of,  133,  134 
Coal-mining, 

cost-finding   method   applicable   to, 
32 
Consignment  records,  2Z^ 
Construction  work, 
cost-finding   method    applicable   to, 
25,  26 
Contracts, 
cancellation  of  government,  540-549 
(See     also     "Government     con- 
tracts") 
cost-plus      (See     "Cos't-plus     con- 
tracts") 
Contract,  wage  system,  106 
Controlling  accounts, 
factory  ledger,  315-337 
adjustments,   335,  ZZ^ 
classification  of,  315,  331-333 

Forms,  332,  333 
closing  of  accounts,  336,  337 
discrepancies,  treatment  of,  335- 
ZZ7 


INDEX 


553 


Controlling    accounts — Continued 
factory  ledger — Continued 

factory  journal,  316 

form  of,  331 

general  ledger,  328,  329 

methods  of  keeping,  315 

summarizing  chart,  330 

verification  of  accounts,  333-335 
finished  stock,  307,  308,  323 

posting  to,  324 
general  ledger,  293-314 

arrangement  of  accounts,  308-310 

entering  costs,  296-298 

grouping,  311-  312 

subsidiary     ledgers     or    analysis 
records,   311,   312 
indirect  expense,  325-327 

Forms,  326 
inventory,  299,  300,  303,  304 

divisions     and     subdivisions     of, 
306-308 

factory  ledger,  308 

methods  of  valuing  merchandise, 
299,  300 

proving  balances,  306,  307 
part-finished  stock,  320-322 

posting  to,  322,  323 
productive  labor,  324,  325 
raw  material,  306,  307,  316,  317 

posting  to,  317,  318 
work  in  process,  307,  308,  318,  319 
Forms,   321 

posting  to,  319,  320 

special    and    standard    products, 
318 
Control  of  cost  records,  293-337 
cash  transactions,  295-298 
chart    of    cost    summary    records, 

313,  314 
illustration     of     ledger     accounts, 

296-298 
income      and      expense      accounts, 

294-337 
methods  of,  293 

pay-roll  and  pay-roll  analysis,  295 
purchase  transactions,  294,  295 
records  of  sales  transactions,  295 
Cost, 
classification  of  enterprise,  400 


compilation,  examination  of  meth- 
od of,  436 
elements    of    (See    "Elements    of 

cost") 
factory,  20 
ledger,  315 

material  (See  "Material,  cost") 
of  sales, 
method  of  ascertaining,  454 
method  of  obtaining,  457 
recording  estimated  costs,  478 
records,  276-281 

sales  and  cost  of  sales  records 
combined  with  shipping  order, 
276,  280 

Forms,  278,  279 
shipping  records,  276 

Form,  277 
summary,  283,  464 

Form,  463 
treated  separately,  280 
period,  243 

principles,  application  of,  10,  11 
product   (See  "Product,  cost") 
Cost  accountant, 
need  of,  399 
work  of,  400 
Cost  accounting, 
functions  and  province  of,  4,  5 
relation  to  general  accounting,  5 
Cost  conference, 
recommendations     of     interdepart- 
mental, 487-494 
forms  and  methods,  493 
summary  of  recommendations,  493 
Cost  department, 
examination  of,  428 
ledger,  315 
Cost-finding, 
importance  of,  3 
methods  of,  24 
chart  showing  application  of,  33 
order    (See    "Order    method    of 

cost-finding") 
process  (See  "Process  method  of 
cost-finding") 
requirements  of,  24 
uniform  methods  of,  11   (See  also 
Cost  methods,  uniform") 


554 


INDEX 


Cost-finding — Continued 
uniform  methods  of — Continued 

advantage  of,  12 

out-growth     of     trade    associa- 
tions, II 

uniform     selling    price     insured 
by,  12 
Cost  methods, 
haphazard,  examples  of,  482,  483 
uniform,  481-486 

advantages  of,  481,  482 

selling  price  based  on,  481,  482 

standardizing  costs,  483-485 
Cost  of  returns  summary,  285,  286 
Cost-plus    contracts,   487-539 
additions     and     special     facilities, 

treatment  of,  497 
administrative    expense,    treatment 
of,  518 

salaries,  518 
betterments  and   equipment,  treat- 
ment of,  497-501 

additions,  497 

fixtures,  499 

freight    and    express    on    equip- 
ment, 500 

housing  of  laborers,  501 

monorail  system,  501 

office  furniture  and  fittings,  499 

rebuilding,  499 

renovating,  499 

setting  up  machines,  501 

special  equipment,  499 

special  facilities,  497 
bonus  payments,  treatment  of,  519 
cancellation     of,     548     (See     also 

"Government   contracts") 
changes  in  specifications,  treatment 

of,  537 
deferred  overhead  charges,  517 

preliminary  expenses,  517 
depletion,  treatment  of,  528 
depreciation,  treatment  of,  528 
fair  terms,  what  constitutes,  488 
fixed  price,  488 
fixed  profit  plan,  491 
forms  and  methods,  493 
freight,   treatment   of   government 

taxes  on,  524 


idle   and    waiting   time,   treatment 

of,  514-515 
insurance,  treatment  of,  521-524 
items    not    chargeable    unless    ap- 
plicable to,  538,  539 
material  and  supplies  items,  treat- 
ment of, 

drayage,  504 

inventory  adjustments,  504 

obsolete  material,  503 

overs,  503 

packing  supplies,  504 

shortages,  503 

spare  parts,   505 

transfers  of  inventory  items,  505 
miscellaneous  items,  treatment  of, 
533-539 

blue-prints,  533 

cash  discount,  533 

defective  work,  534 

drafting  expense,  534 

employment  department,  534 

experimental  expense,  534 

intercompany  expenses,  535 

patents,  535 

rental,  535 

royalty,  535 

scrap   waste,   536 

selling  expense,   536 

testing  expense,  536 

training  employees  expense,  536 

welfare  work,  536 
normal  costs,  494 
overhead,  treatment  of, 

direct   and   indirect   distribution, 
516 

distribution     over     broken     cost 
periods,  516 

products  made  in  bulk,  517 
overtime,  treatment  of,  513 
pensions,  treatment  of,  520 
police  protection,  treatment  of,  531 
purchase-and-sale    contract,     form 

of,  490 
relations  between  government  and 

contractor,  491 
repairs    and    renewals,    treatment 

of,  501-502 
special  rulings,  49J' 


INDEX 


555 


taxes,  treatment  of,  521 
terras  of  contract,  496 
tools,  treatment  of,  507-509 

asset  tools,  507,  512 

classification  of,  508 

distinction     between     tools     and 
machines,   507 

handling,  510 

identification,    513 

method  of  accounting  for,  512 
Form,  511 

perishable,  512 

repairs  and  replacements,  $13 

salvage  of,  512 

scrap  value  of,  508 

storage,  510 

treatment  of  interest  on,  524 
borrowed  money,  525 
equipment,  527 
inventories,  526 
plant,  527 
working  capital,  526 

Cost  records  (See  also  "Cost  sheets," 

"Stock  records") 
and  financial  records,  interlocking, 

5,  300-337 
control  of    (See  "Control   of  cost 

records") 
scope  of,  5 
summarizing     (See    "Summarizing 

cost  records") 

Costs, 
advantages  of  showing  separately,  8 
article,  estimated,  460 
checking,  227,  228 
cost    sheet    basis    for    charging    to 

stock  accounts,  211 
defective  work,  summary  of,  272 
departmental  analysis  of,  485 
detailed  summary  of,  218-221 

Forms,  219,  220 
estimated    (See   "Elstimated   costs" 

also  "Estimating  cost  systems") 
machine,  statement  of,  371 

Form,  372 
manufacturing,  13-23 
material,  91-93 


posting  to  cost  sheets  (See  "Cost 

sheets,  posting") 
sales  records  combined  with,  286- 
288 

Form,  287 
shop  order,  summary  of,  270,  272 

Form,  271 
standardizing,  method  of,  483-485 
statement  of,  366,  368 

Forms,  367,   369 
time  of  compiling,  226,  227 
Cost  sheets,  211-230 
classification  chart  of,  229 
compilation  of,  408 
controlled    by     work    in    process 

accounts,  318 
copy  of  production  order  used  as, 

60,  61 
departmental,  216-218 
Forms,  216,  217 

conditions  under  which  used,  218 
details  shown  on,  215 
envelope  form,  224,  225 
filing,  230 
form  of,  211 
headings, 

information   contained  in,  order 
method,  214 

preparation  of,  214 
inventory     of     work     in     process, 

215,  233 
job  or  order,  212 
posting,  224-227 

labor  reports,  225 

material  reports,  224,  225 

mechanical  aids  for,  226 

overhead  costs,  225,  226 

quantities,  226 

time  of  compiling  data,  226,  227 
procedure  in  handling,  228,  229 
process  method,  212-214 
Form,  213 

labor   and   overhead   costs   com- 
bined, 226 
progressive,  221 

Form,  222 
scope  of,  211 
simple  form  of,  21$ 

Form,  216 


S5$ 


INDEX 


Cost  sheets — Continued 
summarizing, 
adjustments,  228 
records   connect   with   stock   re- 
ports, 242,  243 
summary  of  costs,  detailed,  218-221 

Forms,  219,  220 
tag  or  ticket  form  of,  215,  2l6 

Form,  216 
verification  of,  335 
Cost  summarizing  records,  242-292 
charging      factory      expenditures, 

242-265 
chart  showing,  291 
cost  of  sales,  276-288 
analysis  of  sales  and  costs,  286- 
288 
Form,  287 
cost  of  returns  summary,  285-286 
return  credit  record,  283-285 

Forms,  284,  285 
sales  records,  shipping  and  bill- 
ing   records     combined     with, 

276-281 
Forms,  277,  278,  279 
sales  summary,  281-283 
Form,  282 
defective  work,  272 
departmental  material  used,  269 
departmental  transfers, 
labor,  269-  270 
material,  269 
examination  of,  437 
material  requisition,  266-269 
Form,  267 
combined   with  distribution   rec- 
ord, 268 
overhead   distribution,  272-274 

Form,  273 
posting,  409 
preparing,  243,  409 
purpose  of,  242,  243 
shop  order  costs,  270-272 

Form,  271 
stock  transfers,  269 
summary     of     material     rccciyed, 
258-261 
Form,  258 


summary  of  production,  275 
Form,  274 

transfers   within  the   factory,  266- 
275 
Cost  systems, 

advantages  of,  8-10 

discrepancies,  treatment  of,  335 

elementary,  451-458 
applied  to  several  product  classi- 
fications, 455 

kinds  of,  410 

method  of  starting,  442-447 
classification  of  inventory,  443 
classification  of  product  and  de- 
partments, 448 
overhead  distribution,  447 
reports  and  records,  448 
starting  factory  orders,  446 
test  of  records,  preliminary,  442 

objections  to,  5-7 
Cost  systems,  method  of     installing, 
7,  399-449 

accounting     records,     examination 
of,  437-438 

adjustment  to  existing  conditions, 
404 

auxiliary  mechanisms,  examination 
of,  440 

examination  of  departments,    (See 
"Departments,  examination  of") 

examination  of  existing  system,  415 
efficiency  details,  417 

information, 
method  of  obtaining,  441 
miscellaneous,  required,  439 

internal  problems,  402 

introduction     of     estimating     sys- 
tem, 404 

labor  reports,  examination  of,  433 

overhead  items,  examination  of,  434 

procedure     for     examination     of 
plant,  418 

product  classification,  418 

production     records,     examination 
of,  435 
cost  compilation,  method  of,  436 
cost   summarizing,  437 
finished  parts,  435 
finished  stock,  435 


INDEX 


557 


Cost  systems,   methods  of  installing 
— Continued 
red-tape  pitfalls,  405 
reports, 

for  executives,  405 
of  method,  413 

statements,  examination  of,  438 
summary  of  procedure.  406 
charging  factory,  407 
charging  production  to  stock, 

409 
compiling  costs,  408 
costing  sales,  409 
crediting  production,  408 
delivering   material,   408 
distributing  overhead,  409 
preparing  and   posting   summar- 
ies, 409 
preparing  and  proving  trial  bal- 
ance, 410 
preparing   statements,  410 
proving  pay-rolls,  407 
proving  the  subsidiary  records, 

410 
receiving    and    storing    material, 
407 
Cost  tag,  215,  216 

Form,  216 
Credit  for  material  returned,  86,  88 

Form,  87 
Crediting, 
merchandise  returned,  283-285 

Forms,  284,  285 
work  done  for  administrative  and 
selling  departments,  288 


Day-rate  wage  system   (See  "Wage 

systems,   day-rate") 
Defective  work, 
charging, 

overhead,  reports  for,  190  ^ 
time  spent  on,  134  ,X 
costs,  summary  of,  272* 
recording,  134  > 
repair  or  disposal  of,  52 


reports,  204-206 
Forms,  205 

treatment     under     cost-plus     con- 
tracts, 534  ^ 

Deferred  charges, 
applicable    to    cost-plus    contracts, 

517 
Departmental, 
analysis  of  costs,  485 
and  product  classification,  35-43 
cost  sheets,  216-218 

Forms,  216,  217 
divisions,  designation  of,  37,  38 
material   report,  88 

Form,  89 
material  used,  summary  of,  269 
storerooms,  stock  records  for,  233 
transfers  of  labor,  269,  270 
transfers  of  material,  186 

material  transfer  reports,  89,  90 
Form,  90 

summary  of,  269 
Departments, 
administrative, 

crediting  work  done  for,  288 
examination  of,  419-431 

cost,  428 

dry  kilns,  425 

estimating,  428 

foundry,  424 

packing,  427 

plating,  425 

power,  426 

purchasing,  430 

receiving,  431 

sales,  419 

shipping,  427 

stores,  431 

wood-working,  425 
factory,  classification  of,  35-40 

changes  in,  448 

chart  showing,  41 
miscellaneous,   39 

distribution    of    expenses,   39 
non-productive,  38 

distribution  of  expenses,  38 
productive,  36-38 

basis  for  establishing,  36 


558 


INDEX 


Departments — Continued 
productive — Continued 
"center"     grouping     of     opera- 
tions, 36 
designation  of  departmental  di- 
visions, 37 
proving    estimated    costs    by,    475, 

476 
purchasing    (See   "Purchasing  de- 
partment") 
sales   (See  "Sales  department") 
Depletion, 
treatment     under     cost-plus     con- 
tracts, 529 
Depreciation, 
and  amortization,  154 
abnormal,  160,  161 
legal  definition,  154-156 
charging  off,  method  of,  153,  154 
charging  to  machines,  175 
distribution,  fixing  rate  for,  144 
effect    of    overtime    on,     (auditor 
steel  company  quoted),  156-158 
fixed  charge,  190,  191 
rates, 
building,  146,  147 
equipment,   mechanical   building, 

147 
equipment,  miscellaneous,  150, 151 
equipment,     plant,     power,     etc., 

147,  148 
factors  to  consider,  145 
group,  152,  153 
land,  146 

machinery,  149,  150,  152,  153 
method  of  obtaining,  144 
plant  assets,  398 
schedule  of,  145-151 
special  machinery,   153 
standard,  basis  of,  151 
tools  and  dies,  150,  152,  153 
repairs    and    renewals,    effect    of, 

144,  145 
treatment     under     cost-plus     con- 
tracts, 528 
method  of  figuring,  530 
Design   of    forms,    reports,   records, 

etc.,  411 
Dies,  valuation  of,  398 


Discounts, 
cash,  21-23 
trade,  21 
Distribution, 
of  overhead  (See  "Overhead") 
record,  254-257 
Form,  256 
Donations, 
treatment     under     cost-plus     con- 
tracts, 538 
Drafting  expense, 

treatment     under     cost-plus     con- 
tracts, 534 
Drayage, 
chargeable   to    cost-plus   contracts, 
504 
Dry  kilns,  examination  of,  425 


E 


Efficiency, 
importance  of,  i 

of  factory,  increased  by  standard- 
ized units  of  production,  49 
progress  of,  2 
through  trade  associations,  11 
Elements  of  cost,  13-23 
administrative  expenses,   18,  19 
chart  showing  analysis  of,  22 
direct  charges,  13-16 
indirect  charges,   16,  17   (See  also 

"Overhead") 
packing  expense,  17 
relation  to  selling  price,  19,  20 

diagram  showing,  20 
selling  and  shipping  expenses,  18 
Employees, 
absence  and   tardiness,   record   of, 
117,  118 
Form,  118 
office,  salaries  entered  on  separate 
record,  265 
Employment  department, 
treatment     under     cost-plus     con- 
tracts, 534 
Entertainment  expenses, 
treatment     under     cost-plus     con- 
tracts, 538 


INDEX 


559 


Equipment, 
changes,  statement  of,  349 
depreciation   rates,    147-153 
building    equipment,    mechanical, 

147,   152 
miscellaneous      equipment,      150, 

151 
plant,    power,    and    large    equip- 
ment, 147-149,  152 

interest    on,    chargeable    to    cost- 
plus  contracts,  527 

transfer  between  departments,  396 

treatment     under     cost-plus     con- 
tracts, 499 

valuation  of,  391 
Estimated  costs, 

and  actual  costs,  accounts  showing 
difference  between,  463 

cost  sheets  used  for,  216-218 
Forms,  216,  217 

of  sales,  summary  of,  462 
Form,   464 

schedules  of,  221-224,  462 
Forms,  223,  463 

verification    of     (See    "Estimating 
cost   systems") 
Estimating  cost  systems,  459-480 

adjusting  inventory,  480 

advantages  of,  460 

features  of,  459,  460 

method  of  operating,  460,  461 

verification  by  lots  or  groups,  470- 

475 
analysis    of    opening    inventory, 

472 
labor  costs,  471,  472 
ledger    accounts,    operation    of, 

473.  474 
method  of,  474 
overhead  costs,  472 
raw  material  costs,  471 
special  records  required,  470,  471 
verification    by    operating    depart- 
ments, 475-480 
charges  for  expenditures,  477,  478 
crediting  production,  478 
general  ledger  accounts,  476 
method  of,  479,  480 
recording  cost  of  sales,  478 


special  forms  required,  475,  476 

verification  of  material,  labor,  and 

overhead  estimates,  465-470 

analysis  of  inventory,  465,  466 

Form,  467 
ledger    accounts,     operation    of, 

466,    468 
method  of,  468-470 
special  records  required,  465 
Forms,  463,  464 
verification  of  total  costs,  462-465 
general  ledger  accounts,  463 
method  of,  464,  465 
special  records  required  for,  462 
Forms,  463,  464 
Estimating   department,   examination 

of,  428 
Examination  of  plant,  414-441    (See 
also     "Departments,     examination 
of") 
Expense, 
administrative,   18,   19 
treatment    under    cost-plus    con- 
tracts, 518 
deferred, 

treatment    under    cost-plus    con- 
tracts, 517 
direct,  13,  15,  16 

distribution     over     cost-plus     con- 
tracts, 516-539   (See  also  "Cost- 
plus   contracts,   overhead    distri- 
bution") 
general  operating,  39,  40  (See  also 

"Overhead") 
indirect,   16,   17    (See  also  "Over- 
head") 
packing,  17 
preliminary, 

treatment    under    cost-plus    con- 
tracts,   517 
selling,  18 
Experimental   work, 
charging  time   spent  on,   134,   135, 

190 
expense  departmentalized,  38 
treatment, 
under    cancellation    of    govern- 
ment contracts,  544,  547,  549 
under  cost-plus  contracts,  534 


56o 


INDEX 


">  i ;  r 

Factory, 
charges,  source  of,  407 
cost,  20 

departments     (See     "Departments, 
factory") 

expenditures,  charging,  244-265 

expenses,  statement  of,  370 
Form,  371 

ledger, 
controlling      accounts,      308-310 
(See     also     "Controlling     ac- 
counts, factory  ledger") 
posting    from    pay-roll    analysis, 
262-264 

method  of  crediting,  408 

orders,   45-46    (See   also    "Orders, 
factory") 

overhead  (See  "Overhead") 

production  orders, 
examination  of,  429 
starting  new  orders,  446 
Federal  Trade  Commission, 

recommendations    of,    as   to    cost- 
plus  contracts,  487 
Filing, 

catalogues,  71,  72 

cost  sheets,  230 

orders, 
production,  60,  61 
purchase,  70 
sales,  64 

price  lists  and  quotations,  71,  72 

reports, 
labor,  125 
material,  97 
production,  209 

stock  records,  241 
Financial   records  and   cost  records, 

interlocking,  5,  300-337 
Financial    statements     (See    "State- 
ments") 
Finished  parts, 

inventory,  pricing  of,  389 

part-finished  stock,  distinction  be- 
tween, 51 

production  orders  for,  50,  51 

records,  examination  of,  435 


stock  records,  234 

Finished  stock, 

controlling  accounts,  307,  308,  323 

posting  to,  324 
inventory,  pricing  of,  389 
production  orders  for,  50,  51 
records,  234 
examination  of,  435 

Fixed  charges,  190,  191 
depreciation,  190,  191 
insurance,   190,  191 
interest,  190,   191 
rent,  190,  191 
Form,  191 
taxes,   190,   191 

Fixed  price  contracts,  cancellation  of, 
541  (See  also  "Government  con- 
tracts") 

Fixed  profit  contracts,  cancellation 
of,  546  (See  also  "Government 
contracts") 

Fixtures,  treatment  of,  397 

under  cost-plus   contracts,  499 

Flasks,  valuation  of,  398 

Foodstuffs,  manufacture  of,  cost- 
finding  method  applicable  to,  32 

Foremen, 

charging  time  of,  132,  189 
salaries  entered  on  separate  record, 
26s 

Forms,  design  of,  411 

Foundries,  cost-finding  method  ap- 
plicable to,  30 

Foundry  department,  examination 
of,  424 

Freight, 
and    cartage    inward,    charging   to 

overhead,  141,  142,  195 
and    express     on     equipment,     for 

cost-plus  work,  500 
government    taxes    on,    treatment 
under  cost-plus  contracts,  524 


Gain-sharing,   wage   system,   105 
Gantt  plan,  wage  system,  103 
Garment  manufacturing  plants,  cost- 
finding  methods  applicable  to,  27 


INDEX 


561 


General  ledger, 

accounts, 

estimating  cost  systems,  464,  466, 

468,  473,  474,  476 
on  factory  ledger,  328,  329 

entering  controlling  accounts,  296- 
298 
Gifts,  method  of  charging,  130,  131, 

379 
Government     contracts      (See     also 
"Cost-plus  contracts") 

cancellation   of,   540-549 
amortization,   542,   547,   549 
commitments,  542,  547,  549 
experimental  work,  544,  547,  549 
general  considerations,  540 
inventory  valuation,  541,  548 
leases,  545,  549 
occupancy,  545 

organization  expense,  545,  549 
plant  rearrangement,  544,  547 
profits,  545,  548 
special  books,  544,  547,  549 
survey  clause,  546,  548,  549 

distinction  between, 

fixed  price  and  fixed  profit,  546 
fixed  profit  and    cost-plus,  548 
Guard  house  and  equipment, 

cost    of,    chargeable    to    cost-plus 
contracts,  532 

H 

Hat  manufacturing  plants-, 

cost-finding  methods  applicable  to, 
27,  28 
Heat   (See  "Power,  light,  heat") 
Helpers,  charging  time  of,  132,  188 
Housing  of   work  people,  treatment 

under  cost-plus  contracts,  501 


Ice   manufacturing  plants,   cost-find- 
ing method  applicable  to,  32 

Idle  time  (See  "Time,  lost  and  idle") 

Income  tax, 
treatment     under     cost-plus     con- 
tracts, 524 


Indirect, 
expense   (See  "Overhead") 
labor   (See  "Overhead") 
material    (See  "Overhead") 

Inspection, 
charging  time  of,  133,  189 
expense  departmentalized,  38 

Installation  of  a  cost  system,  399-413 
(See  also  "Cost  systems,  method 
of  instalHng") 

Insurance, 
distribution  of  charges,  136,  137 
fixed  charge,  190,  191 
provision  for  plant  assets,  398 
treatment     under     cost-plus     con- 
tracts,  521-524 

Interdepartmental  cost  conference, 
recommendations  of,  487-492 

Interdepartmental    material    reports, 

91 

Form,  90 
Interest, 

distribution   of,    138-140 

including  as  cost, 
advisability  of,  138,  139 
method  of,  140 

on  mortgage, 
charging  to  overhead,  136,  137 
fixed  charge,  190,  191 

treatment     under     cost-plus     con- 
tracts,     (See     "Cost-plus     con- 
tracts") 
Interlocking    and    agreeing    reports-, 

376 
Interlocking    financial    records    with 

cost  records,  5,  300-337 
Inventory, 

adjustments,  335,  336,  378,  480,  504 
under  cost-plus  contracts,  504 

analysis  of,  303,  304 
Form,   467 

balances,  entering  on  stock  records, 

239 

classification,  method  of,  443 

controlling  accounts  (See  "Con- 
trolling accounts") 

cost  systems  provide,  8 

interest  on,  chargeable  to  cost-plus 
contracts,  527 


562 


INDEX 


Inventory — Continued 
merchandise,     comparative     state- 
ments, 349 
Form,  350 
methods  of  taking,  377-391 
checking,  390 
figuring,  390 

instructing  employees,  382 
listing,  386 

pricing,   232,  387,  388 
preparation,  381 

proving,    93,   232,   303,    306,    307, 
378,  390,  445 
Form,  93 
opening,  analysis  of,  472 
perpetual,    94     (See    also    "Stock 
record") 
advantages  of,  231 
factory   ledger   accounts,   336 
stock  records  provide,  81,  231 
physical,  379 
power  plants,  small,  194 
raw  material,  92-94 

Forms,  93,  94 
sheet,  93,  379 

Forms,  94,  380 
tag  method,  384 

Form,  385 
transfers  of  items  under  cost-plus 

contracts,  505 
valuation, 
closing,  451 
merchandise,  299,  300 
under  government  contracts,  541, 
548 
Invoice  book,  245,  247 
Invoices, 
estimated  costs  entered  on,  478 
from   creditors,   76 
checking,  76 
Form,  77 
purchase  (See  "Purchase  invoices") 
used  as  stock  record   for  outside 
work,  238 


Job  cost-tickets  (See  "Cost  sheets") 
Job  method  of  cost-finding,  25   (See 


also  "Order  method  of  cost-find- 
ing") 
Journal, 
entries,  288,  291,  316 

Form,  290 
vouchers     and     standing     journal 
entries,  288-291 
Forms,  289,  290 


Labor, 
direct,   15    (See  also  "Labor,  pro- 
ductive," below) 
indirect,   16,   17    (See  also  "Over- 
head, labor,  indirect") 
Labor,  productive, 
classification  of,  108 
controlling  accounts,  324 
departmental  transfers  of,  269,  270 
estimated     costs,     verification     of, 
465-470 
Forms,  463,  467 
grouped  operations,  471,  472 
method  of  reporting,  110-112 
mechanical  devices,  no,  in,  113 
standardized  forms,  in 
outside  and  inside  the  plant,  108 
reports,  109-125 

calculating,  123,  124 

chart  showing  classification,  121 

collecting,  123 

combination  reports   for  groups, 

113 
combined  with  production  orders, 

59-61 
disposition      of      indirect      time 

appearing  upon,  112 
examining,  123 
filing,   125 
indicating  accounts  to  be  charged, 

124 
information  furnished,  113 
pay-roll,  259-261 

Form,  260 
pay-roll  analysis,  261-264 

Form,  263 
pay-roll  exception,   117,  118 
Form,  117 


INDEX 


563 


Labor,   productive — Continued 
reports — Continued 
pay-roll  summary,  265 
posting  to  cost  sheets,  225 
posting     to     pay-roll     and    cost 

records,  125 
preparing,  122 
pricing,  123 

procedure   for  handling,   122-125 
production  order  combined  with, 

116,  117 
purposes  of,  109 
rate  records,  119,  120 

Form,  120 
requirements  of,  112-114 
time,   115-117 

Forms,  114,  115,  116 
transfer,  118,  119 

Form,  119 
used  as  production  reports,  204 
verbal,  inadequate,  112 
wage   rate   records    included   on, 
119,   120 
Form,   120 
standardization  of  costs,  484,  485 
time  of  reporting,  109,  no 
transferring      to       non-productive 
work,  188 
Land,  depreciation  rates,   146 
Life  insurance  premiums, 
treatment     under     cost-plus     con- 
tracts, 523 
Light  (See  "Power,  light,  heat") 
Lot  or  group  costs,  estimated    (See 

"Estimating  cost  systems") 
Lost  and  idle  time  (See  "Time,  lost 
and  idle") 


M 


Machine, 
costs,  statement  of,  371 

Form,  372 
installation, 
treatment    under    cost-plus    con- 
tracts,  499 
Machine-cost  method,   30    (See  also 
"Process  method  of  cost-finding") 


Machine-rate  methods,  overhead  dis- 
tribution,  173-178 

application  of,  173,  174 

compiling  rate,  175,  176 

fixed  machine  rate,  177 

forms  of,  174 

sold-hour  method,  177,  178 
Machinery, 

depreciation    rates,    149,    150,    152, 
153 
Machines, 

constructed  on  plant,  valuation  of, 

395 
installation,  expense  of,  395 
treatment  of, 
construction  cost,  395 
cost  of  transfer,  396 
valuation  of  parts,  397 
Maintenance,    repairs    and    renewals, 
charged   against   depreciation,    161, 

162 
effect  on  depreciation,  144,  145 
method  of  recording  charges,  192, 

193 
summary  of  maintenance  and  re- 
pair costs,  270-272 
Form,  271 
Manufactured  parts,  51 
Manufacturing  ledger,  315 
Manufacturing   statement,  343-348 

Forms,  344,  345 
Material, 
bill  of,  84-86 

Form,  85 
cost, 
methods   of  figuring,  91,  92,  93 
storeroom    overhead    added    to, 
91,  92 
delivery  to  operation,  408 
direct,  13,  14 

estimated     costs,     verification     of, 
465-470 
Form,  467 
handling,  procedure  in,  65 
indirect,   16    (See  also  "Overhead, 

material  indirect") 
inventory    (See  "Inventory") 
issuance  of,  82 


564 


INDEX 


Material — Continued 
issued, 
disposition  of,  88 
reporting,  88,  91 

Form,  89 
pricing,  91,  92,  93 
methods   of   figuring   fluctuating 

costs,  92,  93 
scrap  material,  91 
purchasing,  65 
raw  (See  "Raw  material") 
receiving  record,  72,  73,  407 

Form,  73 
records   (See  "Stock  records") 
reports,  66-97 
calculating,  97 
chart   showing   classification   of, 

96 
collecting,  95 
departmental,  88 

Form,  89 
departmental  transfers,  186 
designating      accounts      to      be 

charged  and  credited,  97 
examining,  95 
filing,  97 
for    charging    factory   overhead, 

185-188 
interdepartmental,  91,   186 

Form,  90 
material  received,  74-76 

Form,  75 
material  received,  copies  of  pur- 
chase orders  used  as,  74-  76 
material  transfer,  89,  90 

Form,  90 
material  used,  88,  91 

Form,  89 
numbering,    95 

posting  to  cost  sheets,  224,  225 
pricing,  95,  97 
procedure  in  handling,  95-97 
purchase   requisition,   66-68 

Form,  66 
posting  to  stock  records,  97 
summarizing    and    proving    for 

accounts,  97 
summary  of  departmental  trans- 
fers, 269 


summary    of    material    received, 

257-259 
Form,  258 
summary  of  material  used,  269 
used      as      production      reports, 
203,  204 
requisition    (See  "Requisition,  ma- 
terial") 
returned  credit  slip  for,  86 

Form,  87 
scrap, 
record  of,     128 

direct  and   indirect  charging  of, 
127-129,    186,   187 
storing,  77,  407 
supplies,  direct  and  indirect, 

charging  of,  127,  186-188 
tools  and  dies,  perishable, 
direct  and  indirect,  charging  of, 
129,  187 
transfer,  91,  186 

Form,  90 
treatment     under     cost-plus     con- 
tracts, 503 
Mechanical    aids    for    posting    costs, 

226 
Mercantile  business,  cost  systems  for, 

401 
Merchandise   inventory,   comparative 
statement,  349 
Form,  350 
Merit  plan,  wage  system,  105 
Metal-working     plants,     cost-finding 

method  applicable  to,  28,  29 
Miscellaneous, 
departments     (See     "Departments, 

miscellaneous") 
expenses,  factory, 

distribution  of,  142,  143 
factory    orders,    52-54     (See    also 
"Orders,  factory,  miscellaneous") 
overhead  distribution  methods,  178, 

179 
supplies,  127 
Molds,  valuation  of,  398 
Monorail  system, 
treatment     under     cost-plus     con- 
tracts, 501 


INDEX 


565 


Munitions   Tax  Law,  Treasury  De- 
partment, 
depreciation  and  amortization  defi- 
nition, 154-156 

N 

Non-productive  departments  (See 
"Departments,  non-productive") 

Non-productive  labor  (See  "Over- 
head, labor,  indirect") 

Normal  costs  under  cost-plus  con- 
tracts, 494 


Obsolescence,  154 
Obsolete  material, 
treatment     under     cost-plus     con- 
tracts, 503 
Obsolete  stock, 
statement  of,    361 

Form,  362 
record,  241 
Office  furniture, 
treatment     under     cost-plus     con- 
tracts, 499 
Operating    departments     (See    "De- 
partments, productive") 
Operations,  grouping  of,  "center,"  36 
Order  method  of  cost-finding,  24-29 
and  process  method,  24-34 

chart     showing     application     to 
industries,  33 
applied  to, 

assembling  departments,  29 
boot  and  shoe  plants,  28 
cabinet  shops,  26,  27 
chemical    manufacturing    plants, 

31 
construction  work,  25,  26 
garment  manufacturing  plants,  27 
metal  manufacturing  plants,  28- 

29 
paint  and  varnish  manufacturing 

plants,  31 
plating  shops,  26 
repair  shops,  26 
straw  and  felt  hat  plants,  27 
wood-working  plants,  28 


designation  of  order  and  produc- 
tion report,  200 
distinctive  features  of,  24 
Order  numbers,  45,  54 
Order  register,  60 

standing  orders,  54 
Orders, 

factory,  45-64 
chart  showing  classification,  56 
miscellaneous,    52-54    (See    also 
"Orders       (factory),      miscel- 
laneous" below) 
production,     47-52,     55-64     (See 
also    "Orders,    (factory)    pro- 
duction" below) 
small,  grouping  of,  49,  50 
sub-production,  49 
purchase,  68-70 
Form,  69 
copies  used  as  material  received 

reports,  74-76 
filing  and  disposition  of,  68,  70 
purchase     requisition     combined 

with,  70 
register  of,  70 
Form,  71 
sales,  fi-64 
Form,  62 
filing,    64 
registering,  63,  64 
shipping,  60,  61,  276-280 
Form,  277 
combined   with   billing   and    cost 
of  sales  'records,  276-281 
Forms,  278,  279 
copy  of   factory  order  used  as, 
60,  61 
stores     (See     "Requisition,     mate- 
rial") 
verbal,  iiiadequacy  of,  45,  46 
written,  46,  47 
Orders   (factory),  miscellaneous,  52- 

54 
betterment,    53 
classification  of,  52 
construction,  52,  53 
repairs,   53 
standing,  54 

charging  time  and  material  on,  54 


566 


INDEX 


Orders   (factory),  production,  48-52, 

53-64 
classification  of,  48 
combined  with  material  requisition, 

59,  60 
copies,  number  of,  57 
copy  used  as  shipping  order,  276 

Form,  277 
designing  form  for,  55 
development  of,  58,  59 
duplicate  copy, 

used  as  cost  sheet,  60,  61 

used  as  shipping  order,  60,  61 

examination  of,  429 
filing  and  disposition  of,  60,  61 
finished  parts,  50,  51 
for  manufacture  of  parts,  50,  51 
information     to     be     included     in, 

55,  57,  58 
issuance  of,  55-57 
labor   reports   combined   with,   59- 

61,  116,  117 
production  report  used  as,  59-61 
quantities,  designation  of,  48,  49 
repairs  to  product,  52 
simple  form  of,  57,  58 

Form,  58 
special,  50 
standard,  50,  51 
starting  new  orders,  446 
tag  and  coupon  system,  202,  203 
used   as   production    report,   59-61, 

201 
Overhead, 
chart    showing    classification    and 

distribution,  183 
classification  of,  16,  17,  126 
controlling  accounts,  304,  325-327 

Form,  326 
costs,   uniform   methods   of   treat- 
ing, 484,  485 
deferred  charges,  517 
departmental    application    of,    126- 

143 
distribution  of,  163-189,  409 
adjustment    to    changed    condi- 
tions,  181-184 
adjustments'  of  rate,  334 
bases  of,  178,   179 


direct  and  indirect,  163,  164,  516 
fixed  rates,  180 
fluctuating  rates,  180,  181 
information  necessary  for  estab- 
lishing methods,  434,  447,  448 
machine-rate  methods,  173-178 
miscellaneous  methods,  178,  179 
over  cost-plus  contracts,  516 
over  products  made  in  bulk,  517 
prime-cost  method,   166-169 
productive-labor-cost        method, 

169-171 
productive-labor-hours      method, 

171-173 
sold-hour  method,   177,   178 

entering  costs   on  cost   sheet,  225, 

226 
estimated     costs,     verification     of, 

465-470 
Form,  467 

group  method,  472 
expense  items,  17,  135,  162,  190-197 

depreciation,    144-161    (See   also 
"Depreciation") 

freight  and  cartage  inward,  141, 
142,  195 

insurance,  136,  137,  190,  191 

interest,  138-140,  190,  191 

maintenance,     repairs,     and     re- 
newals, 161,  162,  192-193 

miscellaneous  expenses,  142,  143 

over,    short,    and    damage,    142, 
19s,  196 

power,  light,  heat,  141,  193-195 
Form,  194 

rent,  136,  190,  191 
Form,   191 

taxes,  137,  190,  191 
general  operating  expenses,  39,  40, 

164,  165 
labor,  indirect,  16,  17,  129-135,  188- 
190 

bonuses    not   based    on    produc- 
tion, 130 

defective    work,    employees    on, 
134,  190 

experimental  work,  134,  135,  190 

foremen,  supervisors,  132,  189 


INDEX 


567 


Overhead — Continued 
labor — Continued 
helpers,    sweepers,    truckers,    re- 
pairmen, 134,  188 
inspection,  133,  189 
lost  and  idle  time,  131 
salaries,  factory  clerks',  133,  134, 

189,  190 
superintendence,  132,  133,  189 
material,  indirect,  16,  126-129,  185- 
188 
scrap  or  waste  material,  127-129, 

186,   187 
supplies,  127,  187,     188 
tools    and    dies,    perishable,    129, 
187 
miscellaneous  departments,  39 
non-productive  departments,  38 
records  and   reports,   185-196,  254- 
237,  259-264 
charging  expense  items,  190-196 

Forms,  191,  194 
classification  chart  of  reports,  197 
deferred  expense  record,  196,  197 
distribution    or    analysis    record, 
196,  254-257 
Form,  256 
fixed  charges,   190,   191 
Form,  191 
pay-roll    or    pay-roll    analysis, 
259-264 

Forms,  260,  263 
reporting  time  of  non-productive 

labor,  188-190 
reports     for     recording    indirect 

material,   185-188 
summary  of  distribution,  272-274 
Form,  273 
storerooms,  91,  92 
time  factor  of,  173 
Over,   short,    and    damage, 

charging  to  overhead,  142,  195,  196 
Overtime, 
effect  on  depreciation,  156-158 
maximum    depreciation    percentage 
for      (Captain     J.      P.      Carlin, 
quoted),  158-160 
treatment     under     cost-plus     con- 
tracts, 513 


Packing  department,  examination  of, 

427 
Packing  expense,  17 
Packing  supplies, 

treatment     under     cost-plus     con- 
tracts, 504 
Paint  and  varnish  plants,  cost-finding 

methods  applicable  to,  31 
Paper     mills,     cost-finding     method 

applicable  to,  30 
Part-finished   stock,   50,   51 

controlling  accounts,   320,   322 
posting  to,  322,  323 

finished  parts,  distinction  between, 

51 
production  orders  for,  50,  51 
Patents, 
treatment     under     cost-plus     con- 
tracts, 535 
Patterns,  valuation  of,  398 
Pay-roll,  259-261 
Form,  260 
analysis,  261-264 
Form,  263 
charges  to  jobs,  264,  265 
posting  to  ledger,  262,  264 
purpose  of,  261,  262 
classification,  265 
deductions  from,  261 
exception  report,  117,  118 

Form,  117 
method  of  keeping,  261 
period,    cost   period   in   agreement 

with,  243 
posting  labor  reports  to,   125 
proving  and  charging,  407 
record  attached  to  vouchers,  249 
summary,  process  method,  265 
Pensions, 
treatment     under     cost-plus     con- 
tracts, 520 
Physical    inventory,    379     (See    also 

"Inventory") 
Piece-rate, 
wage    plan    (See    "Wage    systems, 
piece-rate") 


568 


INDEX 


Piece-work, 
wage    systems    (See    "Wage    sys- 
tems, piece-work") 
Plant, 
additions  to, 
treatment    under   cost-plus    con- 
tracts, 497 
and  equipment, 

interest  on,  chargeable   to   cost- 
plus  contracts,  527 
changes,  statement  of,  349 
examination  of,  414-444   (See   also 
"Cost    systems,    method    of    in- 
stalling") 
Plant  assets, 
appraisal  of,  398 

dies,  molds,  etc.  considered  as,  398 
fixtures,  control  of,  397 
machines, 
construction  of,  395 
expense  of  installing,  395 
transfer,  396 

valuation  of  machine  parts,  397 
statement  of  changes  in  value,  398 
tools  treated  as,  396 
control  of,  397 
method  of  safeguarding,  397 
records,  391-398 
Forms,  392,  393 
method  of  filing,  394 
purposes  of,  394 
Plating  room,  examination  of,  425 
Plating   shops,    cost-finding   methods 

applicable  to,  26 
Police  protection, 
distribution  of  charges  to  cost-plus 

contracts,  533 
treatment     under     cost-plus     con- 
tracts, 531 
Posting, 
charges  and  credits  to   stock  rec- 
ords, 239 
from  purchase  record,  245 
labor  reports  to, 
cost  sheets,  225 
pay-roll  and  cost  records,  125 
material  reports,  97,  224,  225 
to    finished    stock    controlling    ac- 
counts, 324 


to    ledger    from    pay-roll   analysis, 
262,  264 

to    part-finished    stock   controlling 
accounts,  322,  323 

to    raw    material    controlling    ac- 
counts, 317,  318 

to    work    in    process    controlling 
accounts,  319,  320 
Power   department,   examination  of, 

426 
Power,  light,  heat, 

expense,   distribution  of,   141,   193- 

195 
Form,   194 

inventory,   power  plant,   194 
Predetermined  costs  (See  "Estimated 

costs  ") 
Premium  plan,  wage  system  (See  also 

"Wage  systems,  premium") 
Premiums  for  life  insurance, 

treatment  under  cost-plus  contracts, 
523 
Price  lists,  quotations  and  records,  71, 

72 
Pricing  raw  material,  232 
Prime-cost  method,  overhead  distri- 
bution, 166-169 

advantages,  168 

conditions   under  which  inapplica- 
ble, 169 

disadvantages,  168 

rate,  calculation  of,  167 
Principles    of   cost-finding, 

application  of,  10,  11 
Process    cost    records     (See    "Cost 

sheets") 
Process     method      of     cost-finding, 

29-34 
and  order  method,  24-34 

chart     showing     application     to 
industries,  33 
applied  to, 

boot  and  shoe  plants,  28 

chemical    manufacturing    plants, 

31 
coal  mining,  32 
foodstuffs,  manufacture  of,  32 
foundries,  30 


INDEX 


569 


Process     method     of     cost-finding — 

Continued 
applied  to — Continued 

garment    manufacturing    plants, 
27 

ice  manufacturing  plants,  32 

paint  and  varnish  manufacturing 
plants,  31 

paper  mills,  30 

plating  shops,  26 

rubber  and  celluloid  manufactur- 
ing plants,  31 

straw  and  felt  hat  plants-,  27-28 

treating  departments,  32 

wood-working  plants,  32-34 
cost  sheet,  212-214 

Form,  213 
distinctive   features  of,  29,  30 
machine-cost  method,  30 
pay-roll  summary,     265 
production, 

orders,  49 

report,  200 

summary,   275 
Process  pay-roll  summary,  265 
Product, 
classification,  40-43,  418,  419,  448 

simple  method  of,  455 
cost,   when  scrap   material   is   util- 
ized, 92 
designation  of,  45 
disposition  of,  207 
progress  of,  shown  on  production 

report,   201 
standard,  orders  for,  50-52 
Production, 
and   shipments,    statement    of,   355 

Form,  356 
charging  to  stock,  409 
costs,  and  estimated  costs,  accounts 

showing  difference  between,  463 
crediting,  408 
manager,  reports  to,  365 
orders,     48-52,     55-64     (See     also 

"Orders   (factory),  production") 
recording,   304,   305 
reporting, 

method  of,  198-209 


time  of,  206 
reports, 
defective  work,  204-206 

Form,  205 
examining,  209 

factory  order  used  as,  59-61,  201 
filing,  209 
form  of,   198 

handling,  procedure  in,  207-209 
labor  reports  used  as,  204 
material  reports  used  as,  203,  204 
order  method  of  cost-finding,  200 
preparing,  207 
process   method   of   cost-finding, 

200 
progress  of  product,  201 
purpose  of,  198 
recording  costs,  209 
simple  form  of,  199,  200 

Form,  199 
summarized,     305 
tag  and  coupon,  202,  203 
statement  of,  355,  366,  368 

Forms,  356,  367,  369 
summary,   274,   275 
Form,  274 
process  method,  275 
Productive    departments    (See    "De- 
partments, productive") 
Productive  labor   (See  "Labor,  pro- 
ductive") 
Productive-labor-cost   method,    over- 
head distribution,  169-171 
applicability  of,  170,  171 
rate,  calculation  of,  169,  170 
Productive-labor-hours  method,  over- 
head distribution,    171-173 
applicability  and  limitations,  173 
rate,   calculation  of,   171,   172 
Product  method  of  cost-finding,  29 
(See  also  "Process  method  of  cost- 
finding") 
Profit  and  loss  statement,  342 
illustration  of,  302 
preparation  of  301,  302,  306 
Profit-sharing  wage  system,  106,  107 
Progressive  cost  sheet,  221 

Form,  222 
Proving  inventory  balances,  306,  307 


570 


INDEX 


Purchase, 
analysis,  245 
invoices, 
adjustments  on  voucher  register, 

254 
entering  in  voucher  register,  247 
listing  and  classifying,  247 

Forms,  247,  248 
method  of  handling,  244,  245 
posting    from    purchase    record, 

245 
reports  supporting,  244 
stamping,  244,  245 
Form,  244 
journal,  245 

orders    (See  "Orders,  purchase") 
record,  245 
Form,  246 
combined  with  voucher  register, 

254 
posting  from,  245 
requisition,  66-68  (See  also  "Requi- 
sition, purchase") 
Purchasing  department, 
examination  of,  430 
reports  to,  361-365 
maximum  and  minimum  quanti- 
ties, 36s 
Form,  366 
merchandise  purchases,   362 

Form,  363 
obsolete  raw  materials,  365 
Form,  364 


Quantities, 
designation  of,  48,  49 
maximum  and  minimum  of  stock, 
67 


Rates, 
depreciation,     145-153     (See     also 

"Depreciation") 
overhead  distribution   (See  "Over- 
head," ) 
overhead      distribution      methods, 
166-184 


adjustment    to    changed    condi- 
tions, 181,  182 
fixed  and  fluctuating,  179-181 
machine-rate,  174-177 
miscellaneous,  178,   179 
prime-cost,    167 
productive-labor-cost,    169,   170 
productive-labor-hours,    171-172 
sold-hours  method,  177,  178 
records,  119,  120  (See  also  "Wage 
rate  records") 
Form,  120 
Raw  material, 
controlling  accounts,  306,  307,  316 
inventory  pricing,  388 
records  (See  "Stock  records") 
requirements,   examination  of,  429 
standardization  of  costs,  484 
storeroom,  316,  471 
verification  of  estimated  costs,  471 
Real  estate  investment, 
treatment     under     cost-plus     con- 
tracts, 539 
Rebates,  special,  21 
Rebuilding  and  renovating, 
treatment     under     cost-plus     con- 
tracts, 499 
Receipt  book,  72,  73 
Receiving, 
department,  examination  of,  431 
record,  72,  73 
Form,  73 
Recommendations  of  cost  conference 

as  to  cost-plus  contracts,  487-494 
Records, 
control  of  cost    (See  "Control  of 

cost  records") 
cost    (See    "Cost    sheets,"    "Stock 

records") 
cost  summarizing  (See  "Cost  sum- 
marizing records") 
design  of,  411 

overhead  distribution   (See  "Over- 
head") 
stock   (See  "Stock  records") 
Register, 
of  purchase  orders,  70 
Form,   71 


INDEX 


571 


Register — Continued 
of  sales  and  costs,  286-288 
Form,  287 
Rent, 
distribution  of,  136 
fixed  charge,  190,  191 
Form,  191 
Rental  charges, 
treatment     under     cost-plus     con- 
tracts, 535 
Repairmen, 

charging  time  of,  188 
Repair    shops,    cost-finding    method 

applicable  to,  26 
Repairs  to  product,  52 
Reports   (See  also  "Statements") 
design  of,  411 

executive,  interlocking  and  agree- 
ing, 376 
labor   (See  "Labor,  productive  re- 
ports") 
material   (See  "Material,  reports") 
on  method   of   installing  cost  sys- 
tem, 417 

production    (See    "Production") 
Requisition, 
material,   82-84 
Form,  83 
bill  of,  used  as,  84-86 

Form,  85 
factory     order     combined     with, 

59,  60,  84 
stock  transfers,  269 
summary  of,  266-269 
Form,  267 
purchase,  66-68 
Form,  69 
combined  with  purchase  order,  70 
disposition  of,  27 
prepared  by,  67,  68 
Reserves, 
chargeable   to    cost-plus    contracts, 
539 
Return  credit  record,  283-285 

Forms,  284,  285 
Returns  summary,  285,  286 
Royalty, 
treatment     under     cost-plus     con- 
tracts, 535 


Rubber    and    celluloid    plants,    cost- 
finding  method  applicable  to,  31 


Salaries, 
clerks',  charging  overhead,  reports 

for,  189,  190 
summary  of,  265 

treatment     under     cost-plus     con- 
tracts, 518 
Sales, 
accounting  for,  295 
and   cost   of   sales   statement,  355, 
3S8 

Forms,      357,  359,  360 
confidential  cost  information,  280 
costing  of,  409 
department, 
crediting  work  done  for,  288 
examination  of,  419 
reports  to,  352 
orders   (See  "Orders,  sales") 
records,  276-280 

Forms,  278,  279 
cost  of  sales  combined  with  ship- 
ping and  billing  records,  276- 
281 

Forms,  278,  279 
estimated  costs  entered  on,  478 
return    credit,    283-285 

Forms,  284,  285 
special  allowances  to  customers, 
283-285 
summarizing  cost  of,  276-288 
analysis-  of  sales  and  costs,  286- 
288 

Form,  287 
cost    of    returns    summary,    285, 

286 
cost  of  sales  summary,  283,  464 

Form,  463 
returns  summary,  285,  286 
sales  records,  shipping  and  bill- 
ing   records     combined     with, 
276-281 

Forms,  277,  278,  279 
sales  summary,  281-283 
Form,  282 


572 


INDEX 


Salesmen's  expenses, 
statement  of,  352 
Form,  354 
Sample  expense,  379 
Scrap  or  waste  material, 
applying  value  of  to  product,  92 
charged  to  factory  overhead,  127- 

129,  186,  187 
direct  material  charge,  127,  128 
stock  record,  128 
tools,  cost-plus  work,  508 
treatment     under     cost-plus     con- 
tracts, 536 
utilization  of,  128,  129 
Selling  expenses,  18 
treatment     under     cost-plus     con- 
tracts, 536 
Selling  price,  19,  20 
based  on, 
estimated  costs,  181,  228 
uniform  cost  methods,  481,  482 
cost-sheets   basis    for   establishing, 

211 
deductions  allowed  from,  21-23 
relation  to  cost  elements,  20 

Form,  20 
uniform,  12 
Semi-finished    goods    stock    records, 

238 
Services  of  expert, 
when  chargeable  to  cost-plus  con- 
tracts, 539 
Shipping, 
department,  examination  of,  428 
orders  (See  "Orders,  shipping") 
Shipments, 
costing  of,  409 
statement  of,  355 
Form,  356 
Shortages, 
treatment     under     cost-plus     con- 
tracts, 503 
Sold-hour   method,    overhead   distri- 
bution, 177,  178 
Spare  parts, 

cost-plus  contracts,  505 
Special-order  method  of  cost-finding, 
25    (See   also   "Order   method   of 
cost-finding") 


Specifications, 
treatment    of    changes    in,    under 

cost-plus  contracts,  537 
Standardization   of   production, 

cost  systems  provide  data  for,  10 
Standard  operation,  wage  system,  105 
Starting  a   cost   system    (See   "Cost 

systems") 
Statements, 
chart  of  factory  and  financial,  374 
comparative  balance  sheet,  339 

Form,  342 
comparative     merchandise     inven- 
tory, 349 

Form,  350 
costs  and  production,  366 

Form,  367 
examination  of  factory  and  finan- 
cial, 437-438 
factory  expenses,  370 

Form,    371 
financial,  298,  299,  338-376 
kinds   of,   338 
labor  statistics  and  costs,  368 

Form,  369 
machine  costs,  371 

Form,  372 
manufacturing,   345-348 

Form,  347 
method  of, 

filing,  375 

preparing,  452 

presenting,  373 
need  of  comparative  analytical,  406 
obsolete  stock,  361 

Form,  362 
plant  and  equipment  charges,  349 
preparation  of,  338 

factory  and  financial,     410 
production  and  shipments,  355 

Form,  356 
profit  and  loss,  342 

illustration,  302 

preparation  of,  301,  302,  306 
reports   to   purchasing  department, 

maximum  and  minimum  quanti- 
ties, 365 
Form,  366 


INDEX 


573 


Statements — Continued 
reports   to  purchasing  department 

— Continued 

merchandise  purchases,  362 
Form,  363 

obsolete  raw  materials,  365 
Form,  364 
sales  and  cost  of  sales,  355,  358 

Forms,  357,  359,  360 
sales  department  reports,  352 
salesmen's  work,  353 

Form,  354 
style  and  ruling,  375 
time  of  presentation,  376 
trading,  348 
Stint  plan,  wage  system,  105 
Stock, 
available   for  unfilled   orders,   rec- 
ord of,  235,  236 

Form,  237 
charging  production  to,  409 
distributing,  wage  system,   106 
maximum  and  minimum  quantities 

of,  67 
obsolete, 

filing  and  disposition  of  records, 
241 

statement    of,    361 
Form,  362 
pricing,  methods  of,  232 
transfers,  summary  of,  269 
Stock  records,  78-82,  231-241 

Form,  78 
adjustments   of,  232 
classification  of,  231 
consignment,  236 
designing  and  verifying,  81,  82 
effectiveness  of,  80 
finished  parts,  234 
finished  stock,  234 
form  of,  240,  241 
functions  of,  80,  81 
inventory,  perpetual,  81,  231 
invoices  used  as,  238 
material     sent     to     outside     con- 
tractors, 238 
method  of  keeping,  231,  232 


obsolete  stock,  241 

procedure  in  handling,  238-241 
entering  inventory  balances,  239 
filing,  241 

posting  charges  and  credits,  239 
testing,    proving,    and   adjusting, 
239,  240 

raw  material,  233 

reference  numbers  and  letters,  80 

reports  furnishing  data  for,  239 

semi-finished  goods,  238 

separate  for  each  storeroom,  82 

simple  types  of,  234,  235 
Forms,  235,  236 

stock  available  for  unfilled  orders, 
235,  236 
Form,  237 

work  in  process,  233 
Storerooms, 

charging  overhead,  91,  92 

department,  examination  of,  431 

departmental,  stock  records  for,  233 

ledger  accounts, 

proof  of  entries,  445 

location  and  arrangement  of,  80 

order     (See     "Requisition,     mate- 
rial") 

product  classification,  aid  in  estab- 
lishing, 43 

raw  material,  316,  471 
controlling  accounts  for,  307 

recording     transfers     of     material 
from,  269 

stock  records  for,  82 
Storing  material,  77,  407 
Sub-production  orders,  49 
Subsidiary      records      (See      "Stock 
records") 

proving,   410 
Summarizing    records     (See     "Cost 

summarizing  records") 
Summary  of, 

cost-finding  methods,  34 
chart,  33 

cost    summarizing    records,    chart 
showing,  292 

defective  work  costs,  272 

departmental, 
material  used,  269 


574 


INDEX 


Summary  of — Continued 
departmental — Continued 
transfers  of  labor,  269,  270 
transfers  of  material,  269 
departmental  classification, 

chart,  41 
factory  orders, 

chart,  56 
handling  material  and  material  re- 
ports, chart  showing,  95 
material  received,  257-259 

Form,  258 
material  requisitions,  266-269 
Form,  267 
combined   with  distribution   rec- 
ord, 268 
method   of   compiling  cost   sheets, 

chart  showing,  230 
overhead  distribution,  272-274 
Form,  273 
chart,  183 

reports,  chart  showing,  197 
production,  274,  275 
Form,  274 
process  method,  275 
productive     labor     reports,     chart 

showing,  121 
salaries,  265 
shop  order  costs,  270-272 

Form,  271 
stock  trans'fers,  269 
Summary  record,  254-257 

Form,  256 
Superintendent, 
charging  time  of,  132,  133,  189 
reports  to,  365 

salaries  entered  on  separate  record, 
265 
Supervisors, 
charging  time  of,   132,  189 
salaries   entered    on    separate    rec- 
ord,   265 
Supplies, 
miscellaneous, 
charging  to  overhead,   127,   186- 
188 
treatment     under     cost-plus     con- 
tracts, 503 


Suspension  of  government  contracts, 
540-549  (See  also  "Government 
contracts,   cancellation  of") 

Sweepers,  charging  time  of,  132,  188 


Tabulating  machines,  226 

Tag  and  coupon  system, 

cost  sheet,  215,  216 

Form,  216 
inventory  method,  384 
production  order  and  report,  202, 
203 
Tally  sheet,  259 
Taxes, 
charging  to  overhead,  137 
excess  profit, 
treatment    under    cost-plus    con- 
tracts, 524 
fixed  charge,  190,  191 
income,  treatment  under  cost-plus 

contracts,  524 
treatment     under     cost-plus     con- 
tracts, 521,  524 
Testing  expense, 

treatment     under     cost-plus     con- 
tracts, 536 
Time, 
charging  to  overhead,  188-190 
helpers,  sweepers,  truckers,  charg- 
ing of,  132,  188 
inspection,  charging  of,  133,  189 
lost  and  idle, 
charging  of,  131,  188 
treatment    under    cost-plus    con- 
tracts, 514 
reports,   115-117 

Forms,  114,  115,  116 
superintendence,  charging  of,   132, 

133,  189 
tickets,  122,  123 
Tool  room,  396 
Tools, 
and  dies,  perishable, 

depreciation     charged     to     over- 
head, 187 
depreciation  rates,  150,  152,  153 
direct  charge,  129 
fixing  responsibility   for,   187 


INDEX 


575 


Tools — Continued 
and  dies,  perishable — Continued 
indirect  charge,  129,  187 
reports  and  records  of,  187 
classification   under  cost-plus   con- 
tracts, 508 
considered  as  plant  assets,  396 
controls  of,  397  ./ 

identification  of,  513  / 
method  of, 

handling  and  storing,  510 

Form,  511 
safeguardmg,  396 
storage,   510 
perish?ble,    treatment    under    cost- 
plus  contracts,  512 
repairs  and  replacements  on  cost- 
plus  work,  513 
salvage  on  cost-plus  work,  512 
treatment  of  scrap  value  on  cost- 
plus  work,  508 
treatment     under     cost-plus'     con- 
tracts, 507-509 
Total  costs, 
verification  of,  estimating  cost  sys- 
tems, 462 

Forms,  463,  464 
Trade  associations, 

efficiency  progress  through,  11 
uniform  cost-finding,  outgrowth  of, 
II 
Trading  business,   cost   systems    for, 

401 
Trading  statement,  348 
Training  employees,  expense  of, 
treatment     under     cost-plus     con- 
tracts, 536 
Treating     departments,     cost-finding 

method  applicable  to,  32 
Trial  balance,  preparing  and  proving, 

410 
Truckers,  charging  time  of,  132,  188 


U 


Uniform  cost  methods  (See  "Cost- 
methods,  uniform") 

"Uniform  cost  system"  impracticable, 
12,  43  J 


Unit  method  of  figfuring  costs,  455 
conditions  to  which  applicable,  456 

Units, 
standardized,  advantages  of,  49 


Valuation, 

closing  inventory,  451 

plant  assets',  391 
Verbal  orders,  inadequacy  of,  45,  46 
Verification  of  estimated  costs   (See 

"Estimating  cost  systems") 
Voucher, 

accounts   payable    (See   "Accounts 
payable  voucher") 

journal,  288 
Form,  289 
Voucher  check,  249 
Voucher  register,  250,  251 
Forms,  252,  253 

advantages  and  disadvantages,  251 

analysis   record   supplementary  to, 

254-257 

Form,  256 
combined  with  purchase  record,  254 
invoice  adjustments  on,  254 
posting   from,  251 
purchase     record     and     purchase 

ledger  combined,  250 

W 

Wages, 
additional    for   overtime,   charging 

of,  131 
deductions  from,  on  pay-roll,  259 
rate, 

records,  119,  120 

Form,  120 
table,   124 
Wage   systems, 
bases  of,  98,  99 
bonus,  104-106 
differential,  104 
direct  charge,  130 
Gantt,  104,  105 
indirect  charge,  130 
labor  reports  used  as  production 
reports,  304 


576 


INDEX 


Wage  systems — Continued 
bonus — Continued 

simple  form  of,  104 

stint,  105 

treatment    under    cost-plus    con- 
tracts, 519 

treatment  when  in  the  nature  of 
gifts,  130,  131 
contract,  106 
day-rate,  99,  100 

applicablity  of,   100 

disadvantages  of,  99,  100 
differential   piece-rate  plan,   103 
gain-sharing,  105 
kinds  of,  98-107 
merit,  105 
piece-rate, 

labor  reports  used  as  production 
reports,  204 
piece-work,   100-103 

dissatisfaction      arising       from, 
100-102 

rate  fixing,  difficulties  of,  loi,  102 

rates,  method  of  fixing,  102,  103 
premium,  104 

introduction  of,  105,  106 

labor  reports  used  as  production 
reports,  204 

time  rate,  basis  of,  104 
profit-sharing,  106-107 
standard  operation,  105 
Stock-distributing,  106 


Waiting  time, 
treatment     under     cost-plus     con- 
tracts, 515 
Welfare  work, 
treatment     under     cost-plus     con- 
tracts, 536 
Wood-working  plants, 
cost-finding  methods  applicable  to, 

28,  32-34 
examination  of,  425 
Working  capital, 
interest  on,  chargeable  to  cost-plus 
contracts,  526 
Work  in  process, 
ascertaining  value  of,  233 
checking  cost  sheet  figures,  239,  240 
controlling  accounts-,  307,  308',   318, 
319 

Form,  321  X. 

posting  to,  319,  320  \ 

special    and    standard    product^, 
318  \ 

cost  sheets  constitute  inventory  of,\ 
215,  233  ' 

inventory, 
pricing  of,  388 
sheet. 
Form,  380 
records,  method  of  handling,  446 
stock  records,  233 
Written  factory  orders,  46,  47 


^ook  is  DUE  on  the  last  date  st<<- 


Li'brary 


Graduate  School  of  Bus-nesB  Ad^inistratl^I 

University  of  California 

1^8  Angeles  24,  California- 


A     000  167  564     4 


